Tuesday, December 12, 2006
Just Don't Mention the DOLLAR
EUR/USD 1.3241 Hi 1.3270 Low 1.3225
USD/JPY 116.91 Hi 117.05 Low 116.69
AUD/USD 0.7857 Hi 0.7878 Low 0.7842
EUR/JPY 154.82 Hi 155.07 Low 154.53
Funny how market views can change overnight. Although there are no real signs that the U.S. economy is about to turn the corner suddenly the market chatter is about if and when the FED will hike and not if and when the FED will ease. And Bernanke gets another shot at things today. Everyone expects him to blatter on about the upside risks for inflation. Inflationary pressures, which he PREVIOUSLY expected to see subside as the economy "cooled", are suddenly a BIG RISK. Bernanke's EUREKA moment seems to have occurred on November 28. Which is interesting. That would be right after Thanksgiving. Right after the USD started to slide. Not that anyone is mentioning the USD. That would be too scary. No-one wants a "disorderly" market. Translation: a crash. So let's go softly, softly on this one guys and hope things pan out.
Not even Trichet DARES mention the exchange rate. In fact at his recent Press Conference Trichet jumped through hoops trying NOT to mention the exchange rate. The EURO, oh that, next question please. And the Central Banks are certainly NOT talking about the massive currency intervention in support of the USD which happened on Friday. Following the release of so-so U.S. Non-Farm Payrolls and pretty bad December Consumer Sentiment numbers from the University of Michigan. No, everyone is being hush, hush about all that. The line being pushed is that the USD, after initially SELLING OFF, turned the corner Friday because the NFP numbers were great (they weren't) and because Paulson said (AGAIN) that "a strong dollar is in our nation's interest". He may as well have said: "being rich is in our nation's interest". Indeed it is but getting rich is slightly more complicated than that. Same goes for the USD. Having a strong USD may well be in the interests of the U.S.A. but ensuring that it remains so is just slightly more complicated than delivering a few well timed statements and some unpublicised Central Bank intervention.
At the FOMC pow-wow today a rate hike is unlikely, but not impossible. And Bernanke is unlikely to linger on any of the scary signs that "things" in the U.S. aren't so great. No talk of the Sub-Prime Lenders who are hitting the wall, no talk of declining credit quality in the U.S., no talk about the Residential Real Estate Market implosion, or the worrying rise in Inventories, or reported weak Retail Sales this holiday season. And though even Alan Greenspan is suggesting that the USD decline has further to go, Bernanke is NOT expected to mention the exchange rate. No. What he will talk about is inflation, the upside risks to price pressures and the need to, maybe, hike rates some time in the near future. As a Debtor Nation the U.S. now has to set its Interest Rates to suit Foreign Investors. Which is normal, it's just news in the U.S. and it's news to the Mr. Joe Average. So expect some fancy footwork as the Powers-That-Be try and explain this unpleasant turn of events to the man in the street. Slowing growth, steady or rising short term rates: welcome back STAGFLATION.
This is not a good environment for Stocks. Though no-one seems to have noticed. Yet.
Meanwhile back at the White House crisis talks continue. The crisis, of course, is IRAQ. The great big new idea is: Iraq's neighbours need to take over while the U.S. gets the hell out. This idea seems to have been generated without much in the way of consultation with Iraq's neighbours. But then strategic planning never was a George W. forté, so same old, same old. The upshot is that while Iraq's neighbours do have an interest in seeing the carnage and disruption stop they are unlikely to get involved without an incentive. And the incentive on the table is: Israel. Yes, after Cheney was summoned to Saudi Arabia at Thanksgiving Israel suddenly announced a withdrawal from Gaza. Now, this could have been just a bizarre coincidence but in the murky area of International Relations there are rarely any coincidences.
As all this unfolds no-one is concentrating on economic policy. Well, except for Henry Paulson who is off to China to try and convince them that what China really needs is a WEAKER USD, whoops make that a STRONGER Chinese Yuan. The fundamentals remain USD negative. The question remains: how short is the market? The answer is: very short. And the Central Banks are still lurking. That's about the most positive thing that can be said for the USD right now. We may see slightly more USD "strength", er USD short covering, in the very near term. As always, longer term players should SELL the USD rally.
OIL 61.34
GOLD 634.10
And while every economic analyst out there is quietly REVISING DOWN their forecast for U.S. economic growth, the Commodity Markets are seeing some SELLING again. More selling pressure is likely. Over at Morgan Stanley Stephen Roach is sticking to his forecasts and they are, of course, all a bit grim. The upshot though is that DEMAND for commodities is likely to "moderate" over the next 12 months or so. Bad news for AUD bulls and bad news for OIL bulls.
Over the longer term USD weakness should provide a real base for GOLD to outperform other assets. The short term is slightly more tricky.
USD/JPY 116.91 Hi 117.05 Low 116.69
AUD/USD 0.7857 Hi 0.7878 Low 0.7842
EUR/JPY 154.82 Hi 155.07 Low 154.53
Funny how market views can change overnight. Although there are no real signs that the U.S. economy is about to turn the corner suddenly the market chatter is about if and when the FED will hike and not if and when the FED will ease. And Bernanke gets another shot at things today. Everyone expects him to blatter on about the upside risks for inflation. Inflationary pressures, which he PREVIOUSLY expected to see subside as the economy "cooled", are suddenly a BIG RISK. Bernanke's EUREKA moment seems to have occurred on November 28. Which is interesting. That would be right after Thanksgiving. Right after the USD started to slide. Not that anyone is mentioning the USD. That would be too scary. No-one wants a "disorderly" market. Translation: a crash. So let's go softly, softly on this one guys and hope things pan out.
Not even Trichet DARES mention the exchange rate. In fact at his recent Press Conference Trichet jumped through hoops trying NOT to mention the exchange rate. The EURO, oh that, next question please. And the Central Banks are certainly NOT talking about the massive currency intervention in support of the USD which happened on Friday. Following the release of so-so U.S. Non-Farm Payrolls and pretty bad December Consumer Sentiment numbers from the University of Michigan. No, everyone is being hush, hush about all that. The line being pushed is that the USD, after initially SELLING OFF, turned the corner Friday because the NFP numbers were great (they weren't) and because Paulson said (AGAIN) that "a strong dollar is in our nation's interest". He may as well have said: "being rich is in our nation's interest". Indeed it is but getting rich is slightly more complicated than that. Same goes for the USD. Having a strong USD may well be in the interests of the U.S.A. but ensuring that it remains so is just slightly more complicated than delivering a few well timed statements and some unpublicised Central Bank intervention.
At the FOMC pow-wow today a rate hike is unlikely, but not impossible. And Bernanke is unlikely to linger on any of the scary signs that "things" in the U.S. aren't so great. No talk of the Sub-Prime Lenders who are hitting the wall, no talk of declining credit quality in the U.S., no talk about the Residential Real Estate Market implosion, or the worrying rise in Inventories, or reported weak Retail Sales this holiday season. And though even Alan Greenspan is suggesting that the USD decline has further to go, Bernanke is NOT expected to mention the exchange rate. No. What he will talk about is inflation, the upside risks to price pressures and the need to, maybe, hike rates some time in the near future. As a Debtor Nation the U.S. now has to set its Interest Rates to suit Foreign Investors. Which is normal, it's just news in the U.S. and it's news to the Mr. Joe Average. So expect some fancy footwork as the Powers-That-Be try and explain this unpleasant turn of events to the man in the street. Slowing growth, steady or rising short term rates: welcome back STAGFLATION.
This is not a good environment for Stocks. Though no-one seems to have noticed. Yet.
Meanwhile back at the White House crisis talks continue. The crisis, of course, is IRAQ. The great big new idea is: Iraq's neighbours need to take over while the U.S. gets the hell out. This idea seems to have been generated without much in the way of consultation with Iraq's neighbours. But then strategic planning never was a George W. forté, so same old, same old. The upshot is that while Iraq's neighbours do have an interest in seeing the carnage and disruption stop they are unlikely to get involved without an incentive. And the incentive on the table is: Israel. Yes, after Cheney was summoned to Saudi Arabia at Thanksgiving Israel suddenly announced a withdrawal from Gaza. Now, this could have been just a bizarre coincidence but in the murky area of International Relations there are rarely any coincidences.
As all this unfolds no-one is concentrating on economic policy. Well, except for Henry Paulson who is off to China to try and convince them that what China really needs is a WEAKER USD, whoops make that a STRONGER Chinese Yuan. The fundamentals remain USD negative. The question remains: how short is the market? The answer is: very short. And the Central Banks are still lurking. That's about the most positive thing that can be said for the USD right now. We may see slightly more USD "strength", er USD short covering, in the very near term. As always, longer term players should SELL the USD rally.
OIL 61.34
GOLD 634.10
And while every economic analyst out there is quietly REVISING DOWN their forecast for U.S. economic growth, the Commodity Markets are seeing some SELLING again. More selling pressure is likely. Over at Morgan Stanley Stephen Roach is sticking to his forecasts and they are, of course, all a bit grim. The upshot though is that DEMAND for commodities is likely to "moderate" over the next 12 months or so. Bad news for AUD bulls and bad news for OIL bulls.
Over the longer term USD weakness should provide a real base for GOLD to outperform other assets. The short term is slightly more tricky.
Labels: Bernanke, Monetary Policy, Stocks, USD
Thursday, November 16, 2006
Magical Thinking Applied to Economics
EUR/USD 1.2801 Hi 1.2842 Low 1.2793
USD/JPY 118.04 Hi 118.32 Low 117.74
AUD/USD 0.7685 Hi 0.7699 Low 0.7642
EUR/JPY 151.13 Hi 151.48 Low 151.08
We live in a world where some people actually believe that if they rearrange the letters of their names the entire course of their lives will be changed. So it shouldn’t really surprise me that this magical thinking extends to the field of economics, which is after all mostly guff and spin. But still it does surprise me. Most economists I know wouldn’t be able to run a business if they tried very hard and they certainly don’t have what it takes to run an economy but these are the priests of the New Age and we go to them, and our Central Banker friends, and ask for tokens to keep the bad spirits away.
What exactly is the RIGHT official cash rate, we enquire? What is the correct exchange rate? What is the right ratio of Government Debt to GDP? And these numbers, once established to the satisfaction of the priesthood, we take away with us. We applaud when Central Bankers fight their way to achieving the right numbers. We applaud when the Government announces the right bottom line. And if, by some sad chance, the numbers are not as they should be then everything suddenly becomes very dark.
The central premise here is that if we can just get the numbers right, an inflation rate which is where it should be, exchange rates right on the button, official cash rates which are not too hot, not too cold, then we don’t really have to worry about anything else. Our job is done, the Gods of the economy have been sated. We no longer have to worry about infrastructure or education or crime or how we allocate resources, productive investment or indeed anything. We can in fact all go off to the beach safe in the knowledge that the dark forces of the world are being kept at bay because our friends at the Central Banks have found the right numbers. Dumb, crazy, intellectually lazy ideas are part of how we live now.
The idea that a healthy economy requires continual work to keep things ticking along, that we can not afford to neglect public infrastructure, or private investment, that we must maintain what has been created and look to improve our productive capacity over time with well thought out investments is simply too complex. Predicting the numbers and watching the numbers has become what the economy is really all about. And what are the numbers telling us right now?
Well the news is bad, which means it’s good. The U.S. Consumer seems to have fallen down a well. Retail Sales numbers released this week were considerably below expectations. What’s more previous results were revised DOWN, by a lot. Overall, even with the FED in PAUSE mode, there isn’t much sign that Mr. Joe Average is getting ready to whip out his credit card any time soon. This week’s PPI and CPI data told a similar story: there is not enough strength in domestic demand in the States to allow prices to rise. And they’re not. They are falling.
Some of this has to do with the correction in OIL and commodity prices which has been registered recently and a lot of this has to do with the inability of U.S. business to shift inventory without cutting prices. And this is not just impacting the Residential Real Estate Market.
So, the upshot? Well we have a FED in PAUSE mode with little likelihood of a RATE HIKE any time soon. And so, with no room for a HIKE, the market is waiting for a signal that RATES will fall. The idea that the PAUSE will continue indefinitely is not really on the agenda. This is not a USD bullish development. Indeed, the recent short term USD rally seems pretty close to being over and we can all put our SELL USD hats back on.
The state of the U.S. economy and the implications for the FED FUNDS rate has comforted the Stock Market bulls. The idea, of course, is that the only thing which counts is whether the FED is going to hike, pause or CUT. And cut is winning. The fact that U.S. companies may see their profit margins eroded by weak domestic demand is not a concern right now, though historically it is hard to make a case for rising Stocks at a time of economic retrenchment. For now the Stock Market bulls are going to see how far they can push this, secure in the knowledge that the high priests at the FED will do what they have to with interest rates and that will be sufficient to cure all the U.S.'s economic ills. Well it worked for Japan, no actually it didn't. Oh well never mind. If fiddling with Cash Rates doesn't work maybe we can rearrange the letters of "Federal Reserve" and that will make everything better.
OIL 59.21
GOLD 627.40
With the USD back under a cloud, the GOLD bulls are back. We still have a way to go before we test recent highs. We need to see significant USD weakness and ongoing and more aggressive DIVERSIFICATION out of USDs by Central Banks before this trend really takes off. Some suggest that both are simply a matter of time.
USD/JPY 118.04 Hi 118.32 Low 117.74
AUD/USD 0.7685 Hi 0.7699 Low 0.7642
EUR/JPY 151.13 Hi 151.48 Low 151.08
We live in a world where some people actually believe that if they rearrange the letters of their names the entire course of their lives will be changed. So it shouldn’t really surprise me that this magical thinking extends to the field of economics, which is after all mostly guff and spin. But still it does surprise me. Most economists I know wouldn’t be able to run a business if they tried very hard and they certainly don’t have what it takes to run an economy but these are the priests of the New Age and we go to them, and our Central Banker friends, and ask for tokens to keep the bad spirits away.
What exactly is the RIGHT official cash rate, we enquire? What is the correct exchange rate? What is the right ratio of Government Debt to GDP? And these numbers, once established to the satisfaction of the priesthood, we take away with us. We applaud when Central Bankers fight their way to achieving the right numbers. We applaud when the Government announces the right bottom line. And if, by some sad chance, the numbers are not as they should be then everything suddenly becomes very dark.
The central premise here is that if we can just get the numbers right, an inflation rate which is where it should be, exchange rates right on the button, official cash rates which are not too hot, not too cold, then we don’t really have to worry about anything else. Our job is done, the Gods of the economy have been sated. We no longer have to worry about infrastructure or education or crime or how we allocate resources, productive investment or indeed anything. We can in fact all go off to the beach safe in the knowledge that the dark forces of the world are being kept at bay because our friends at the Central Banks have found the right numbers. Dumb, crazy, intellectually lazy ideas are part of how we live now.
The idea that a healthy economy requires continual work to keep things ticking along, that we can not afford to neglect public infrastructure, or private investment, that we must maintain what has been created and look to improve our productive capacity over time with well thought out investments is simply too complex. Predicting the numbers and watching the numbers has become what the economy is really all about. And what are the numbers telling us right now?
Well the news is bad, which means it’s good. The U.S. Consumer seems to have fallen down a well. Retail Sales numbers released this week were considerably below expectations. What’s more previous results were revised DOWN, by a lot. Overall, even with the FED in PAUSE mode, there isn’t much sign that Mr. Joe Average is getting ready to whip out his credit card any time soon. This week’s PPI and CPI data told a similar story: there is not enough strength in domestic demand in the States to allow prices to rise. And they’re not. They are falling.
Some of this has to do with the correction in OIL and commodity prices which has been registered recently and a lot of this has to do with the inability of U.S. business to shift inventory without cutting prices. And this is not just impacting the Residential Real Estate Market.
So, the upshot? Well we have a FED in PAUSE mode with little likelihood of a RATE HIKE any time soon. And so, with no room for a HIKE, the market is waiting for a signal that RATES will fall. The idea that the PAUSE will continue indefinitely is not really on the agenda. This is not a USD bullish development. Indeed, the recent short term USD rally seems pretty close to being over and we can all put our SELL USD hats back on.
The state of the U.S. economy and the implications for the FED FUNDS rate has comforted the Stock Market bulls. The idea, of course, is that the only thing which counts is whether the FED is going to hike, pause or CUT. And cut is winning. The fact that U.S. companies may see their profit margins eroded by weak domestic demand is not a concern right now, though historically it is hard to make a case for rising Stocks at a time of economic retrenchment. For now the Stock Market bulls are going to see how far they can push this, secure in the knowledge that the high priests at the FED will do what they have to with interest rates and that will be sufficient to cure all the U.S.'s economic ills. Well it worked for Japan, no actually it didn't. Oh well never mind. If fiddling with Cash Rates doesn't work maybe we can rearrange the letters of "Federal Reserve" and that will make everything better.
OIL 59.21
GOLD 627.40
With the USD back under a cloud, the GOLD bulls are back. We still have a way to go before we test recent highs. We need to see significant USD weakness and ongoing and more aggressive DIVERSIFICATION out of USDs by Central Banks before this trend really takes off. Some suggest that both are simply a matter of time.
Labels: Central Banks, Economic Cycles, Monetary Policy
