Macro
The Fed, and other central banks, have a tool for controlling interest rates reflected in the base rate they set for banks themselves to borrow. But, as I alluded to in my comment on the 13th October, it is a very blunt tool for what is a delicate operation. To use a rather crude analogy, it’s a bit like a sawn-off shotgun – which simply sprays lots of little pellets in the vague vicinity of where you are aiming. This is no precision instrument like a rifle, it has very poor range and is not accurate at a distance, but at close range, you can’t really miss hitting “something” with a sawn-off shotgun.
We’ve had all this monetary easing from the Fed but ,while we have had massive asset-price inflation in the markets, none of this has really translated to real inflation at the consumer level, why is this? Well, as I mentioned on the 14th October, this is due to the inadequacy of the transmission mechanism within the monetary (banking) system. By taking extreme measures to inflate the monetary base, the Fed has raised the stakes of monetary policy, its put the scalpel back in the drawer and taken out the shotgun. Things are going to get messy.
So now I conclude a week of focus on the Dollar. After reading comments for the last 3 days we are now well versed in many of the fundamental economic attributes contributing to the plight of the Greenback:
- We know the difference between: Money, Currency and Capital.
- We know why inflation is ultimately a monetary phenomenon.
- We know that the Fed is taking extreme monetary policy measures.
- And now we know what a sawn-off shotgun is!
But most of all we know what the implications are, structurally, to the stability of the Dollar – it’s a very delicate balance right now. Staying on my “eggs theme”: Bernanke is now required to crack an egg with a shotgun and he only has one shot at this. The theory might be just to graze the shell with a pellet so that only the top of the egg comes off but the reality is; the shotgun is a brutal, crude instrument. He risks either missing altogether or catching the egg with a pellet and smashing it to pieces. His best option is to aim squarely for it, ensure a certain (inflationary) outcome, then try to pick up the pieces later – this is what I have referred to in previous comments as “Hair of the Dog Monetary Policy”. As far as the Fed is concerned, missing the target completely (deflation) is simply not an option. But what’s interesting is that, now the stakes have been raised, there is no option which is good for the Dollar. Extreme measures by the Fed have the Dollar caught between a rock and a hard place.
While the Dollar remains vulnerable, it does not necessarily mean it will continue to go down continuously – afterall this is all a game of relativity and there are other currencies which are precariously balanced too. While none of them are as structurally weak as the Dollar (apart from Sterling perhaps) the “branding” of the Dollar is still largely a subjective art form (in which the US Treasury is currently trying to produce its masterpiece), opinion on this will be subject to seasonality and ambiquity of critiques, like me. Also, in my opinion, the Dollar is oversold on many technical indicators and is due a reversal. Compounding this is “the carry trade” and the fact that I’m pretty sure there is a huge Dollar short out there waiting to be squeezed. There is not telling where the Dollar will go from here in the medium term, but over the long term, asking people to have deep faith in a currency which is being systematically devalued by the Fed and the Treasury is a tall order.
You know it’s quite simple really; if Gucci cut the price of all their produce by 90%, everybody would go out and buy something from Gucci, but then their label will become ubiquitous, the luxury brand would lose it’s gloss and the company would eventually die. So it is with the “luxury brand” of the Dollar. To quote Chris Mayer, in the Daily Reckoning:
The US dollar is a sort of monetary brand. And like any other brand, it can fall out of favor. Even iconic brands can rapidly lose their “must- have” ache. Sometimes, a brand can disappear entirely, as did Pan American Airways or “Members Only” jackets. But there is always something else waiting to take its place. So it is with the US dollar, a brand making lows in the financial markets.
The dollar has been the “Coca-Cola of monetary brands,” says James Grant, editor of Grant’s Interest Rate Observer. But even the best of brands can be lousy investments. Grant uses the analogy of The New York Times. It was the greatest name in newspapers. In 2002, the stock sold for $53 per share – an all-time high, as it turned out. Today, the “Gray Lady” fetches only $8 per share.
Here we get to John Paulson, a presenter at the Grant’s Fall Investment Conference and undoubtedly the richest man in the room. Portfolio magazine dubbed him “The Man Who Made Too Much” after he made $3.7 billion by betting against mortgage-backed securities (MBS). He is one of the greatest hedge fund managers ever.
As to why, Paulson presented a simple, but compelling case. First, the monetary base has exploded in a way we’ve never seen before. The monetary base is essentially the Federal Reserve Bank’s currency and reserves. The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.
That means that as the monetary base expands, the money supply surely follows, though there is a lag. (Money supply is a broader measure of money than just the monetary base, as it includes personal deposits and more. The monetary base is like a kind of monetary yeast. It makes money supply rise.)
If money supply grows faster than the economy, that will create inflation, says Paulson. As it is impossible for the economy to grow anywhere near that vertical spike in the monetary base, Paulson contends inflation is coming.
While I very much doubt the Dollar will lose its status as the Global Reserve Currency – the message to China and other surplus, savings nations with trillions of Dollars of bank reserves is clear: yolk-hungry Ben’s on the loose with a sawn-off shotgun, do not put all your eggs in one basket.
I leave you with this, courtesy of Bloomberg: Comments on the Dollar
Macro Data to Watch:
- Japanese Jobs surprise to the upside!
- Japanese CPI comes out roughly in-line at -2.2% YoY
- Singaporean Jobs Numbers out today
- South Korean Industrial Production
- Italian CPI
- Belgian GDP
Markets
Well, what a surprise for US GDP, up +3.5% and higher than the average estimate of +3.2%. But what surprised me more what the way the markets traded – equities took a while to get going and the Dow was only up 0.5% at the open. But the markets eventually warmed to the number and equities continued to trade higher into the close completely reversing all the losses from the day before.
After reaching a rather ominous level of 28, the VIX collapsed back down to 25.
The British Pound rallies against both the Dollar and the Euro.
Global Stocks to Watch:
- Some huge reversals in the banks (RBS up nearly 10% for example) – worth watching these to see how they close the week.
- Miners are reversing losses too – Rio Tinto up 5% already.
- Earnings:
- ICICI Bank (India)
- United Overseas Bank (Singapore)
- Hon Hai Precision
- Samsung Electronics
- Sony, Toshiba, Panasonic
- Denso, Toyota
- NTT Docomo
- WPP
No comments:
Post a Comment