Wall Street Bailout - This whole thing cannot end well…

Foreign Exchange Currency Outlook : Today we get personal income and spending, but since the data is backward-looking and the world has changed forever, probably not of much interest. Bloomberg reports that consumer spending probably rose in August on auto “incentives” for a rise of 0.2%, the same as July. “The average gain was 0.3% a month during the last official recession, in 2001.” Economists surveyed by Bloomberg in the first week of September forecast consumer spending in the third quarter will be flat, the weakest since 1991, following a 1.2% pace in the second quarter.

Economists forecast overall economic growth of 1.2 percent in Q3. Note that everybody is watching spending, but incomes count, too. Incomes probably rose 0.2% in Aug, after a drop of 0.7% in July. If incomes and spending are the same, that means no savings.

The details of the Paulson bailout plan are available online. The market is not judging details, just the fact that a deal was reached, even though the Senate won’t vote on it until Wednesday. Constructive criticism was slow to emerge this time, for some reason. To cries of “let the bastards fail,” we are astonished that Bernanke, the great expert on the Great Depression, failed to make more of what happened the last time the country engaged in letting the bastards fail. The Treasury Secretary at the time was Mellon, and his watchword was “Liquidate! Liquidate! Liquidate!” In other words, the emotional response (to a dyed in the wool capitalist) is to throw the miscreants under the bus, but it was the wrong thing in the 19030’s and would have been the wrong thing today.

Even as things stand today, with relief that the main political fight is over, we will now have a horrible period, perhaps lasting years, about what other plans could have been devised to do the job better without violating core principles. Every little piece of data that comes in will be viewed under the lens of the bailout plan. This is “woulda, coulda, shoulda” and is inevitable under the circs. It will be tiresome but it’s essential. Everyone is making jokes about “socialism” for the rich—and nobody is defining “socialism” or even nationalization. If a government takeover is intended to be short-term, lasting only until the entity can go back to being fully private, is it really “socialism”? We could spend all day on this kind of thing, to no real purpose. At a guess, government really should not be in the business of business because it almost always does it really badly, and this time whoever gets hired to do the actual work is going to be under a microscope. This is good but then we tend to miss the forest for the trees.

This whole thing cannot end well…

Everyone is mad as hell, but refusing to accept the lesson from Sweden’s financial sector crisis in
1991-93. Sweden selected the banks that could survive and injected equity capital into them. It worked, even though it took three years and cost the country a 5% contraction in GDP over the three years. Paulson is trying to avoid this outcome but it’s not clear it can be done with the current plan. It fact, many observers say it cannot be done with the current plan. It’s too little money, and it doesn’t address the need for capital. We are starting to get scared. The Japanese response to the US bailout and the European rescue operations is interesting-foreign exchange traders say they are relieved the Paulson plan got resolved, but they worry that it won’t work because it’s not big enough or comprehensive enough or pointed directly at the core issue, which is the housing sector. Accordingly, the the US Dollar Exchange Rate first went up during the Tokyo session but then gave it back. A loss of confidence in the US tells in the dollar. We will know probably by the end of this week whether loss of confidence is going to be the dominant theme.

On the bright side, expectations of the plan’s failure and/or upcoming US recession tend to lower oil and other commodity prices, and in the short-term, that tends to be dollar-supportive. So we have conflicting factors, lots of them, and the charts are of little help. Late Friday it really looked like the US Dollar correction was ending—but then fundamentals (bad news from the UK and Europe) trumped the charts. We try to reconcile the fundamentals with what the charts are saying, but today both the analysis of the fundamentals and chart-reading are giving off too much noise.

The solution is a situation like this is to retreat to the sidelines.

Bye for Now

Barbara Rockefeller - Forex Trading Reports

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