Does this mean the Fed has room for another interest rate cut, or series of cuts? Yes.

Foreign Exchange Outlook: Everybody wants to know how deep the recession will go. Yesterday’s retail sales for Sept were worse than forecast, a drop of 1.2% (including a drop of 4% for autos), while every one of the 12 regional Feds reported a slowdown in consumer spending. The Empire State manufacturing index slumped to a shocking -24.6 from 7.5 in Oct. And inflation hasn’t really started falling much-the headline PPI fell 0.4% but ex-energy, rose 0.4%. PPI is up 8.7% y/y, and core PPI is up 4%. Some of this is the pig in the python and will eventually get digested, but the misery index is about to go up quite a bit, and moreover, everyone knows it.

Today we get CPI at 8:30 am ET, probably a rise of 0.2% (but with forecasters showing a wide range from –0.3% to +0.2%, according to Bloomberg). Core CPI is probably up 5% y/y, better than Aug at 5.4% y/y. Core CPI is probably 2.5% y/y, the same as August.

Does this mean the Fed has room for another rate cut, or series of cuts?

Yes.

It will be interesting to see how the Fed weaves together monetary policy, now in lights-flashing emergency mode, with a new willingness to consider bursting bubbles before they blow up too far. This seems to be the new Bernanke stance, after two decades of the Greenspanian hands-off attitude toward bubbles. Speaking to the Economic Club of New York yesterday, Bernanke said we need to take a fresh look at how regulation and monetary policy might take on the “dangerous phenomenon” of asset bubbles—after the current crisis is past. It’s fun to note that when Greenspan held his first Fed board meeting, according to Woodward’s Maestro and other books about the Greenspan Fed, he asked why the Fed was doing nothing about the stock market at the time. This was just ahead of Black Monday. In other words, Greenspan was not always a hands-off guy on Randian principles.

Also today we get industrial production for Sept, probably a drop of 0.8% in the Sept month for the second month of decline.

The other important piece of data today is the August Treasury capital flow report, TICS. Bloomberg reports that forecasters expect foreign investors to have raised their stakes in US assets in August to $30 billion from $6.1 billion in July. We await the authoritative report from Bank of New York capital flow expert Woolfolk, who separates out the true long-term flows from the shorter-term hot money.

The sentiment in the oil industry is that the recession will be deep and long-lasting, hence the dramatically falling prices. With the US already having done a consumer stimulus in the spring, many interest rate cuts, and a bank bailout, is it running out of bullets? We say the oil gang lacks faith in the ingenuity of politicians newly motivated to keep their jobs. We tend to throw the bums out when they fail us so drastically. What else can the US do to goose growth and avert recession another day? Plenty. Congress could do an emergency tax cut for business, or another stimulus for consumers, plus the usual rate cuts. Poor Bernanke-he really is going to be stuck with the Helicopter Ben image.

Does this stuff work?

Yes, as we saw with the $300/$600 tax rebates.

Does it suffice to keep the economy rolling along for one or two more months? Yes. As Keynes said, the long-run is only a series of short runs. It’s a little like catching a cold-suppress the symptoms, and while you still have a cold, it does pass after ten days. The goal of the Fed and government is to prevent us feeling the symptoms-scratchy throat, runny nose, and coughs. Your head can rationally say conditions are terrible but an extra $300 in your pocket makes you willing to overlook what the brain is telling you. We don’t know nearly enough about behavioral economics, but we bet that some initiatives (like job creation in the alternative energy sector) will have a salutary effect even among people who could never get one of those jobs, because it gives the sense that “somebody is doing something.”

This brings us back to the election, now less than three weeks away.

McCain wants to give a tax break to rich people, which does trickle down but not to the extent he claims.

Obama wants to give a tax break to the working class, subsidize alternative energy, and spend big sums on infrastructure, among other things, which puts cash in more pockets right away.

It’s a no-brainer which is better for the economy and the prospect of the US coming out of recession. Foreign Exchange traders are opportunistic-even if they buy the old Reagan ideology, they can see which side of the bread has the butter. This is the sense in which Obama is dollar exchange rate favorable and McCain is not, quite apart from the cost of the war in Iraq. People don’t want ideology today-they want cold, hard cash.

Considering the state of the auto industry and the difficulty of getting a car loan today, we would not be surprised to see some new government program to subsidize the average Joe buying a new car. Maybe there can be a Freddie/Fanny for car paper guaranteed by the government? Quick, stop them before they invent another new program.

On the whole, the US dollar exchange rate looks good for a day or two, before the next Event.

Buy for Now

Barbara Rockefeller
Forex Trading Reports

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