US Congress discussing and passing the Obama $800 billion stimulus plan

Foreign Exchange Outlook : This is a week of an overwhelming amount of information. Nobody can absorb this much information, let alone analyze it and put it into perspective. Aside from the US Congress discussing and passing the Obama $800 billion stimulus plan, nearly all the news is going to be bad. As we have seen recently, bad news is US dollar favorable because risk aversion rises.

Tomorrow is the start of a 2-day Fed meeting.

With the target rate range already zero to 0.25%, what can the Fed say to impress anyone? The FOMC needs to make a powerful statement lest anyone notice that it has run out of ammunition, presumably more talk about quantitiative easing. This will probably take the form of expanding the TALF (Treasury Asset-Backed Liquidity Program) to include not only Treasuries but also CMBS (commercial-mortgage-backed securities) or private-label RMBS (residential mortgage-backed securities), according to Market News. So far the government has not actually bought any Treasuries, let alone private paper, but we probably should expect it this week.

Also tomorrow Congress starts debating the Obama stimulus plan, which Obama wants done by the President’s Day national holiday on Feb 16, or two weeks from today. The Feb 16 holiday is a compromise date between Lincoln’s birthday on Feb 12 (also Darwin’s birthday, take note) and Washington’s birthday on Feb 22 (also USAF Col. Gary Rockefeller). We guess the stimulus debate will not be bi-partisan, judging from the Sunday TV talk shows where Republicans have one solution to everything, including athlete’s foot and the flu - tax cuts.

Also tomorrow is the start of the Davos World Economic Forum, for which the high and mighty pay a gaint fee to attend (Chf 42,500). The WSJ says 40 heads of state will attend this year, up from 27 last year, and some 1400 CEO's. Everyone will be talking about how bad conditions are and how much worse they can get, especially since the IMF is expected the next day to lower its global growth forecast to a mere 1%. The WSJ says that among the scheduled speakers is Richard Olivier, son of the late British actor Sir Laurence Olivier, who runs a motivational seminar company. Olivier says "The capitalist myth is lovely and youthful. It kicked off the industrial revolution, but maybe we need a new one." He will compare MacBeth to Lehman Bros.

Oh, good grief.

Anyone who thinks capitalism is a myth shouldn't take the stage in the first place.

Also tomorrow is US existing home sales and the Case Shiller home price index for November. Thursday brings Dec durable goods orders, taken as a leading indicator of everything from industrial production to employment. From an economics point of view, the biggie is Friday’s US GDP estimate… and the Friday after that, the Dec payrolls number.

There probably is some good news in all this somewhere - some data last week was not bad, like the University of Michigan consumer confidence index (61.9% from 60.1 in Dec and the highest reading since Sept). But the ain’t over yet. We await other dire news, like German bank failures or the Chinese declining to buy US paper (they could buy Greece instead), and so on.

Bad news is US dollar-favorable. We do not have strong evidence of the trend failing, and the trend is our friend.

Bye For Now

Barbara Rockefeller
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risk aversion is rising and rising risk aversion is dollar exchange rate favorable

Foreign Exchange Outlook : The USM service sector report is due today, probably a drop to 42 or the lowest since the index was invented in 1997. We also get the ADP Macro forecast of private sector jobs ahead of Friday’s critical payrolls report. This is oddly not much on the radar screen yet, even though on Monday the DJ Newswire reported a median estimate of 200,000 jobs lost. Potentially disturbing is a story in the WSJ asserting that Paulson is thinking about asking for the other half of the 700 billion in TARP money authorized by Congress. Originally his idea was to leave half of it for the incoming Obama administration. He would act next week if he acts at all (he leaves for China today or tomorrow, a wasted trip if ever there was one). This raises the question of what Paulson knows that the rest of us do not.

We hate to say it, but if stocks are down today, that implies risk aversion is rising and rising risk aversion is dollar exchange rate favorable. Bah. This is no way to run a currency market. With average daily ranges shrinking and little directional guidance, we have to expect a breakout at some point - but probably not today. We may have to wait for Friday’s payrolls for that, unless tomorrow’s rate cuts do the job.

Bye For Now

Barbara Rockefeller
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Australia and New Zealand Dollar, the prospect of rate cuts is currency-negative this time.

Foreign Exchange Outlook : As we have been emphasizing, one major reason for the US dollars firmness during this crisis is "it's worse elsewhere," making the dollar a safe haven. The news from the UK is particularly dire. The Reserve Bank of Australia, Bank of England and ECB are all expected to cut interest rates this week, a move that traditionally weakens a currency but recently has been seen as a good thing because it may unclog the credit pipes and also demonstrates responsiveness. With central banks wagging an admonitory finger on credit quality behind the scenes, it’s not clear that lower rates have their accustomed power to goose lending and activity, though.

Still, in Australia (and New Zealand), the prospect of rate cuts is currency-negative this time. After a tame inflation report in Australia, the Australian Dollar fell on the widening view that the RBA could cut as much as 75 bp to 4.5% at the policy meeting tomorrow. Curiously, the Australian stock market fell on the rate cut outlook.

Aggressive rate-cutting around the world may be a dollar exchange rate supportive factor-or may not. A lot depends on the rhetoric. Too much fear and panic expressed out loud by central banks is good for the US dollar rate, while too smug a view (by, for example, the ECB) is also good because it shows a lack of responsiveness. In short, central banks have to perform a real balancing act. The appearance of desperation is also dollar friendly via the oil and other commodity price connection. We continue to think the oil - dollar correlation is more important than any other intermarket analysis.

In the US, we get a ton of data this week, including the ISM's manufacturing sector data for Nov and a Bernanke speech today, plus the usual barn-burner, the payrolls report on Friday. The ISM report is likely to show a contraction in manufacturing for the 4th month in November, perhaps to the lowest in 28 years, according to Bloomberg. This is bad for the economy and for confidence but very nice for the price of oil resuming its downtrend.

Most of the factors are lining up for a dollar rally today and perhaps all week. We worry a little that normally dollar exchange rate negative factors are being ignored, thought. Any development along those lines (terrorism, China, payrolls) could cause a confusing halt in the run.

Bye For Now

Barbara Rockefeller
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We guess the US dollar will survive this round, too

Foreign Exchange Outlook : Everyone is looking at institutional factors like the Citibank bailout and hardly anyone is looking at macroeconomic indicators, but today we get existing home sales, probably a drop by 3.5% to an annual pace of 5 million. It will be the biggest monthly drop since Sept 2007, according to the Bloomberg survey. In the absence of a plan to stabilize the foreclosure rate and housing prices, the focus is in institutional failure rather than the economic consequences of the data itself. This is US dollar exchange rate negative. But can it be overwhelmed by an Obama spending plan due this week? Yes, but perhaps only temporarily. Spending itself is not enough you need a wide, deep and intelligent plan that everyone can believe in. Already we are seeing “anti-Keynesian” diatribes. Poor Keynes. He is getting blamed for a lot of things he never said or recommended. He did not say "spend your head off, debt doesn’t matter." Of course debt matters.

Without going further down that ideological road, consider the advice from some currency gurus who say “buy currency of creditor countries (like Japan) and sell the currency of debtor countries (like the UK and US).” This is like buying stocks of companies whose book value is greater than their stock prices. But countries don’t have book values. What counts is not the balance sheet, but the ability to generate cash. And here we have to consider not only the government and its ability to tax, but also the ability of private institutions, mostly banks, to generate the cash to pay the monthly bills and survive one more month. In the US, the TED spread (the 3-month Treasury rate vs. interbank LIBOR) is widening out again to 216 bp (according to Bloomberg), from the low in May of 76 bp and the worst-case high of 464 bp on Oct 10. The Fed is making funds available to just about every central bank in the world, including the Swiss and the Mexicans, but who comes first? US banks.

Longer run, the US printing all that money is an evil thing that will come back to haunt us. But in the immediate futures, like this week and next, it’s a powerful argument for the safe-haven status of the US to continue. Institutionally, perhaps the US doesn’t deserve the crown of safe-haven. The US is blundering badly. But in this matter of the crisis, it is still the leader-liquidity comes before solvency. We can worry about credit quality later.

How much money are we talking about? Bloomberg added up all the government programs and arrives at a figure of $7.4 trillion, or about half of US GDP. “Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.” The bailout includes the $700 billion in TARP; $2.4 trillion in commercial paper; $1.4 trillion from the FDIC to guarantee bank-to-bank loans; $29 for the JP Morgan takeover of Bear Stearns; $122.8 billion in addition to TARP allocations for AIG, and now $20 billion directly to Citi plus $306 billion of government guarantees for troubled mortgages and toxic assets.

Bloomberg writes “The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to CBO figures. It could pay off more than half the country’s mortgages.” Moreover, the Fed is responsible for $4.4 trillion of pledges, or 60% of the total commitment of $7.4 trillion-this is what we should be worried about, not the $700 billion in TARP. Bloomberg is miffed because the government won’t disclose the collateral taken, with Bernanke calling it “unproductive” to disclose it.

It goes without saying that this is the biggest bailout ever, dwarfing the Chrysler version, the steel companies, the S&L’s, etc. Is it quibbling to ask whether it’s “investing” or “spending”? Probably not, since the rule of deleveraging together with bad credit quality means downsizing, i.e., permanent losses. We are all going to be made poorer by this, but in the end, what counts is the ability of the US government to sell the paper to get the money it needs to save Citibank and all the others. Can we do it? Yes. Britain is neck-and-neck on aggressive stimulus and other plans. Paulson did a bad job but the job is getting done. We guess the US dollar will survive this round, too.

Bye For Now

Barbara Rockefeller Foreign Exchange Trading
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Foreign Exchange Outlook

Foreign Exchange Outlook : The US dollar has two big black clouds hanging over it. First is the election and then there is payrolls.

Today the US election is everything. If it’s an Obama landslide and/or if there is no dispute over the fairness of the counts, that would remove a black cloud hanging over the dollar from the last election. We also want to hear right away - this week - the name of the incoming Treasury Secretary and some broad outlines of the financial plan. A $1 trillion budget deficit is very big dollar exchange rate negative. Assurances of an effort to balance the budget would go a long way, even if they are not really credible.

Once the election is over, attention will turn immediately to ADP’s forecast tomorrow of the payrolls numbers on Friday. Market News gets a survey average result of a drop of 200,000 in Oct, but estimates range from –85,000 to –230,000. The jobless rate, the worst fiction in the data pantheon, will probably rise from 6.1% in Sept to 6.3% but perhaps as much as 6.4%. Realistically, it’s probably 8-10% already if the count were done properly.

There is a consensus of opinion from Foreign Exchange commentators everywhere on the US election. Calyon wrote "We think a decisive win in the Senate for the Democrats as well a win for Senator Obama, as the polls indicate, would boost risk appetite as the risk of political paralysis will be reduced going forward.” Separately, UBS says the focus will shift to the "transition between administrations and how the president-elect handles the growing budget deficit."

Let’s say McCain wins and payrolls show a gigantic drop of 230,000 or more. The US dollar exchange rate would be toast by noon on Friday - to the recent high of 1.3298 - on the prospect of more shooting wars, endless deficits, and probably a disputed vote count. Can an Obama win offset really bad payrolls data? Yes, maybe. If Obama wins, the US dollar has a real chance of proceeding on its upward trend on "fundamentals" other than the safe-haven flow from deleveraging, or "forced liquidation," as Jimmy Rogers puts it. In other words, the US dollar would get a positive reason to be firm rather than a negative one. As we all know from the Economist’s poll and other surveys, the world would vote for Obama if it could. This is just a funny tidbit except in the context of confidence in US management of the economy and thus potential capital inflows.

We could name a third black cloud - Crude Oil.

With a new embrace of risk and stock markets generally unwilling to accept the recession/deflation/Depression scenario, it’s possible that oil stops falling. It’s hard to say how big a factor this might be. To sell dollars in a knee-jerk “because” oil is rising sounds stupid, but some folks do it. At the least it can have an effect for a few days. A bigger effect is on the US current account deficit (remember that?). We need oil prices to fall to avoid another round of twin deficit talk.

Even with falling oil prices, the current account deficit has structural characteristics that make it slow to fall. And with the appetite for a doubling of long-term debt unknown (hence talk of revising a 3-year note to bridge maturities), the US could actually face funding difficulties. The Treasury capital flow report has not been dollar exchange rate friendly lately, although it’s distorted by emergency cash–raising, revulsion from Freddie/Fannie, and the like. But in the Big Picture, the US needs to show progress on the current account if funding needs are doubling. It’s not clear how that can be accomplished. Again, we have to say that longer-term, it’s all too easy to make the case against the dollar. But in the meanwhile, keep the faith. Things are worse elsewhere.

A big bad Event can easily restore the US dollars fortunes, and if we have learned anything over the past year, it is to expect surprises

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Barbara Rockefeller
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This is the sense in which the credit crisis will end when house prices stop falling.

Foreign Exchange Outlook : Deleveraging is a word that has now reached the mainstream. Call it what you like - capitulation, liquidation, contraction - cash is now king again. Heaven only knows how long it will take for "credit-worthiness" to be a viable concept again. Not to be overly simplistic, but if you can't lend on the word of honor of the borrower, how about lending against collateral? That works when the price of the collateral is known and there is a liquid market for the collateral.

This is the sense in which the credit crisis will end when house prices stop falling.

This gets a little tricky since we know prices always overshoot, but we may have some evidence-home sales rose 5.5% in the latest month, mostly due to unloading of foreclosed properties. The median sales price of single-family detached homes plunged from $405,000 a year ago to $239,000 last month. How much is enough? Rising sales are scattered across the country and it’s not a universal phenomenon yet… and globally, foreclosures and price drops are just starting in some places, like China.

What about other forms of collateral, like high-value manufactured goods or even commodities like gold? They gain value only when the sale price is known, as in the form of a bill of sale or receivable that can be discounted. We are back to factoring and discounted trade paper, which they had in Babylon. This is not such a bad thing but it speaks volumes about modern embellishments to the credit scene-dross, all of it.

Nothing says this louder than the ratings agency executives testifying to Congress last week. They tried to weasel out of acknowledging complicity in putting a rating on paper that deserved to be rated “zero quality.” Yes, there’s plenty of blame to go around but the ratings agencies seem the most venal, alongside the originators.

To get back to cash, Business Week reports that in Dubai’s lush luxury real estate market, lenders are requiring as much as 70% down. At another extreme, after the stock market meltdown in Japan in the early 1990’s, citizens preferred cash and postal (government-guaranteed) savings. Bankers used to go door-to-door politely asking housewives to make a bank deposit from the nestegg under the floorboards. The US is not Japan but there might be a universal human impulse to embrace risk aversion. Business Week reports that sales of home safes are up 50% in the past 4 weeks and currency in circulation is up sharply in the last month for the biggest increase since Y2K in 1999. You can see the chart at the St. Louis Fed website (http://research.stlouisfed.org/fred2/series/WCURCIR). It’s worth a quick look.

Everyone knows the multiplier effect from Econ 101. Banks need deposits to make loans, even if they were willing to make loans in the first place. Deposits are the raw material of banking. We do not yet have the rising unemployment that will contract deposits naturally, but we already have hoarding of cash. This is not healthy for GDP. We get the preliminary Q3 GDP on Thursday, probably a contraction of 0.5% (like the UK). This is going to scare people even more.

But for once the US dollar exchange rate is not suffering from the grim outlook because conditions are worse elsewhere. Bloomberg reports that the deleveraging that already began in the US and Europe is now spreading to emerging markets. "Banks have extended about $2.5 trillion in foreign currency loans to emerging markets, according to Barclays, which cited data compiled by the Bank for International Settlements in Basel, Switzerland. Some 70% of the claims on developing nations in Asia mature in less than one year, while the amount for emerging European countries is 43%."

Barclays says “The increasing difficulty facing developing countries to roll over their foreign currency loans may set the stage for even greater strengthening of the US dollar.'' A sum like $2.5 trillion is not trivial. We need to start thinking of failed states. So far we have Iceland and Argentina, but soon we will be getting the list of the others from the experts. We will be surprised by some of the names-we always are. The Ukraine, the Baltic states-and who else?

Back in the US, we have unreasoning panic starting to develop. We don’t need the government to say "Liquidate! Liquidate everything!" as the Treasury Secretary said during the Hoover years—we have individuals and the private sector doing that on their own. Pretty soon we will hear another round of blame laid at the doorstep of hedge funds, which will be unfair. Some 10,000 hedge funds hold some $1.7 trillion in assets and will have to contract to only a few hundred funds holding perhaps $300 billion in assets, but hedge funds are only the visible part of the contraction. Regular banks, regular pension funds and regular mutual funds are dumping assets, too. Again, as we wrote before, we don’t know who has the credibility and stature to bring this to a halt. Maybe Obama? But when?

Until we get leadership, the only thing to do is buy dollars and buy Treasuries.

Buy for Now

Barbara Rockefeller
Forex Trading Reports

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Bank of New Zealand and Canada to cut interest rates

Foreign Exchange Outlook : We have yet to get an “October surprise,” the attention-grabbing Event manufactured specifically to influence the election. Perhaps conditions are so bad today that collectively they are the October surprise. Or perhaps in a few days we will get another tape from Osama bin Laden, who sent one four days before the 2004 election.

Even without a terrorist event, we have plenty of potential surprises. Today we get the Conference Board leading indicators, and we know it will be dismal. Bernanke testifies to the House Budget Committee on the US economic recovery. Recovery? We can’t talk about recovery until we have hit bottom, can we? Tomorrow we get the Bank of Canada (and Reserve Bank of New Zealand) rate decision. Canada is seen cutting 50 bp and New Zealand to cut interest rates 100 bp. These are smaller economies but probably in the forefront of more cuts to come until there’s nothing left for savers at all, exactly as occurred in Japan.

We have far too much information in the world today. Nobody can digest it all. It’s tempting to forget about the world of finance and just watch the increasingly lurid soap opera of the US presidential election. But some things stand out-if Iceland really did commit a sovereign default, it doesn’t matter that it’s a tiny country with fewer people than a Manhattan block of apartment buildings. It’s the way of the market to ask "Who’s next?" and then try to get a self-fulfilling prophecy. Hungary? Ukraine? Russia itself? All the fine talk of “recovery” is PR smoke.

There can be no recovery until all the damaged planes have crashed.

We are not there yet.

Still to come are regional US banks that the Feds won't save, among other disasters. All in all, this is awful stuff but good for the US dollar exchange rate.

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Barbara Rockefeller
Forex Trading Reports

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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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The financial sector crisis is bad enough but a stock market meltdown is more than symbolic—it’s true wealth destruction.

Foreign Exchange Outlook : G7 will meet starting this Friday but it seems sensible to conclude from prices that the Foreign Exchange market has zero faith in G7 to take any action that will change the landscape. What we got instead was action from the central banks. This has a number of ramifications, not least that political institutions, including ministries of finance/treasuries, are shackled, whereas the least political institution, central banks, can take action.

In short, government gets in the way.

The best thing governments ever did was to make central banks independent.

What it also means is utter desperation. It is commonly accepted that interest rate levels have virtually no influence on trust and confidence, the lack of which is at the heart of the current liquidity and credit crisis.

What is important is whether European Interest Rates stabilize today and tomorrow. While the US banks are underbidding for special TAF money, the ECB, Swiss National Bank dollar offerings were over-subscribed with coverage ratios of 4.43 for the eurozone and 2.23 for Switzerland. The credit and liquidity issues are bigger in Europe than in the US and UK. It would be nice to think that the US and UK may now stabilize, each with its big plan, but if it is true that the world is flat, the US and UK need Europe to stabilize, too.

At some point the public is going to wake up to what the central banks undoubtedly already know -the US taxpayer will be rescuing banks in Spain and Italy. This doesn’t mean the US will take a loss -the ECB stands behind all its US dollar borrowings—but at some point it will look like an expensive bailout at US taxpayer expense. Just as the Mexican Peso bailout ended costing the US taxpayer nothing, this one will likely not be a net drag, either, but politically it’s dynamite. Top officials in Europe, like Brown and Germany’s FinMin Steinbrueck, blaming the US for everything, is not wise. It was hardly the US that allowed/encouraged European banks to leverage themselves to 50x.

This crisis is worse than we thought. We are still grappling with the economic outlook now that credit is sure to be cut to vastly lower levels for a long time to come. We do not have an estimate of what proportion of firms in the US absolutely, positively need to borrow to buy supplies and make their payrolls, but it must be a big number. Let’s say it’s 50%. Does that mean activity (GDP) will contract by 50%? Not exactly, but it’s not 5%, either. And the more stock markets fall and the cost of overnight and short-term money rises, the longer it will take to dig ourselves out of this mess.

We don’t know why the governments do not simply declare for the stock markets the equivalent of a bank holiday, which was the tactic used in the 1930’s. It’s not a run on the banks, like then, but it’s a run on the stock market. So far today stock markets are responding favorably to the coordinated rate cuts, but in the end, it’s foolish. Economic contraction is still ahead and any analysis of the situation that doesn’t take that into account is simply wrong. Yes, some companies will do well in terms of ongoing business - those who don’t need to borrow and who peddle essential items (Cramer names household goods suppliers like Colgate - we still need to brush our teeth during a crisis).

But stocks are certainly headed thousands of points lower and any rallyette today is a time to sell anything still on the books. Note that getting money of hedge funds is hard—they all have notification periods of 60-90 days, so that even a fund of funds, which faces the same notification criteria—is stuck holding ever lower-priced assets. It’s not the job of the government to protect rich people who invest in hedge funds or funds-of-funds, but surely they are not offal to be kicked to the dogs. The financial sector crisis is bad enough but a stock market meltdown is more than symbolic—it’s true wealth destruction. People who could tolerate and wait out the drop in home values are not going to be so calm about seeing their portfolios go to hell, too. There is an authentic wealth effect, even if we can’t measure it very well. People who feel poor simply do not spend. The consumer is two-thirds of the US economy. If industry is going down and the consumer is going down and finance is already in a hole, what is left? Government. What a terrible thing to be forced to say!

Out of all this emerges the ultimate vote-of-confidence—the dollar exchange rate. We continue to think that aside from the US dollar to Japanese Yen, the dollar will do very well against the other majors. Not because the US is superior in any way, but because the US is the biggest and the first and the most essential. We see the pound to dollars exchange rate down around 1.6500 (long-term) and the euro exchange rate at 1.2000 before year-end.

This may be one of the greatest George Soros standard Foreign Exchange trading opportunities ever.

Buy for Now,

Barbara Rockefeller - Forex Trading Reports

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If Europe wises up and announces a coordinated plan, however bad, the euro carnage could stop

Foreign Exchange Rate Outlook : Trichet gives a speech this morning, but all eyes are on Bernanke, who will report on the economic outlook (12:30 pm ET) to the National Association of Business Economists in Washington. G7 meets Friday in Washington. European finance ministers are meeting in Luxembourg today. As we have noted before, an institutional development can always trump the trend. If Europe wises up and announces a coordinated plan, however bad, the euro carnage could stop. What’s really strange is to see the euro exchange rate falls so far against the Japanese yen, when Japan really has very little to recommend it except a banking sector not in crisis.

Something will happen to halt this move, although nobody can say what it is just yet. Maybe regulators will close the stock exchanges, although that’s a third-world kind of action (take three
times yesterday in Brazil). Perhaps the Europeans will come up with something that looks like a plan, even if it isn’t. Britain seems to be a half–step ahead of Europe institutionally but facing a potential interest rate cut this week. The US Treasury needs to get started right away on using it’s $350 billion to unclog arteries. If the credit and liquidity crisis go on into next week, recession will be the least of our worries. We are an intermittent gold bug—and this is one of those times. It’s a weird but understandable to support the case for a stronger dollar exchange rate as the same time we think we see gold going higher, too. They are both safe havens today.

It would be nice to see the famous inverse correlation take a hit to the jaw.

Bye For Now

Barbara Rockefeller - Forex Trading Reports

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Reserve Bank of Australia and Bank of England to Cut Interest Rates

Foreign Exchange Outlook TreasSec Paulson’s once-bright image is now more than a little tarnished after his plan gave the appearance of an arrogant power-grab, leaving Fed Chairman Bernanke as the sole standing hero. Bernanke speaks about the economy tomorrow and everyone is waiting breathlessly until we hear what he has to say about further federal government bailouts of everybody from General Motors (Detroit already got a little-noticed $25 billion in last week’s bailout) to the states (California Governor Schwarzenegger already applied on Friday). As noted by many observers, it’s a little silly that a state--with taxing authority--can’t peddle its bonds, or that companies with raw materials and inventory can’t get a loan at a sensible rate.
The total lack of trust is what is gumming up the works, and nowhere is the lack of trust worse than in our inability to price credit default swaps. As perpetual bear James Grant said on “60 Minutes” last night, we don’t even know the face value of the market, probably somewhere between $50-65 trillion. Credit default swaps were invented as insurance against default, but not named “insurance” because then the contracts would have to be regulated by the insurance regulators, not to mention being put on balance sheets. This is the market Warren Buffett said was pure poison a few years ago. It is also the market that put AIG on the block to the Feds. Solve the credit default swap problem, and a lot of other problems go away. We have no idea how this could be achieved and at a guess, neither does the Fed-yet.

The Reserve Bank of Australia meets tomorrow and the Bank of Enlgand meets on Thursday, with both banks forecast to cut interest rates by 50 bp. The Fed meets Oct 28-29 and the ECB next meets Nov 6, but chatter is going around that the central banks could coordinate rate cuts or at least all cut by the same amount. As noted above, monetary policy has exhausted its capability to goose markets, but never mind—rate cuts are good for confidence because it shows the governments are not dithering. In fact, Market News reports that the Swiss newspaper Sonntag reported yesterday (without naming sources but claiming they are “independent and credible”) that the Swiss National Bank will cut rates 25 bp by December at the latest, and the action could come as a coordinated move with the BoE and ECB.

Other policy options, in the US at least, include promises to bail out just about anybody who asks, something the cartoonists have already latched onto. The problem is not whether this is “socialism” or against US principles-of course it’s against US principles-but how to fund it. The only people with national savings (reserves) are in the Middle East and Asia. These countries lack developed capital markets (not to mention the rule of law, getting a bit battered these days), and so we imagine that Paulson and others have already been burning up the phone lines to these countries asking for a form of petro-dollar recycling.

This was a big deal in the late 1970’s and early 1980’s as it became clear that countries with newfound wealth had no real place to stash the cash. This time we have Emirates building islands in the sea shaped like palm trees and skyscrapers going up in Shanghai, so opportunities to invest domestically are not as scarce as thirty years ago-but still not big enough or safe enough for all the savings.

Why should these people rescue us now? After all, we brought in on ourselves with over-spending and stupid math-based con games.

Well, it may be touch-and-go, but in the end, the mercantilist argument will probably win. These countries, from Saudi Arabia to China, are export-based economies. No exports, no economy. No exports, no revenue to buy off restive populations who have a newfound hankering for everything from indoor plumbing to a Mercedes Benz in every driveway. They will rescue us because it is their political self-interest to do so. But these people are very, very smart and can see that the price can be forced to a very high level. Buffett has shown the way and established a new benchmark for big deals-10% dividend plus equity options. By the time this is over, over half the US economy can belong to the Middle East and
Far East. No wonder Western companies are wooing suitors in Japan so assiduously these days.
And the US is out ahead of the pack with initiatives to fix the situation.

Citibank got a court to open up on a Sunday to press its case for Wachovia over a competing bid from Wells Fargo. This is crass, but imagine a court opening on a Sunday in (say) France. In Europe, Trichet said it all-“We are not a political federation. We do not have a federal budget.”

So if a Middle East sheikh or Chinese agency wants to invest in “Europe,“ where do they send the check? This is an echo of Kissinger asking what telephone number to dial when he wants to negotiate with Europe. Well, perhaps this crisis today will nudge Europe toward greater federation, but we wouldn’t count on it.

Finally, where is G7 or G8? It was supposed to meet at the end of this week. The only validity the group can have going forward lies in expanding G8, which already includes Russia, to include China, and perhaps Brazil. We assume the British would never agree to inviting India, and the US may baulk at Brazil. Maybe we need a new kind of organization altogether, once that negotiates directly with OPEC, say. The Group has become increasingly toothless and irrelevant. If it is to survive, it must act this week. For that to be effective, Europe has to act as a single entity on the financial crisis, too. Until the rest of the world gets its act together, the US Dollar exchange rate will continue to be favored, even though it can hardly be said the US is doing a good job. In fact, it’s doing a terrible job, but it’s showing it can do something, even if it’s wrong. Action is better than paralysis, politically. We like the US dollar this week, and we also like the yen, especially in the old carry-trade crosses. The commodity currencies will be the hardest hit, since global recession hits commodities first. And we still await word from china about what it wants from all this.

There is no solution without China.

Bye for Now

Barbara Rockefeller - Forex Trading Reports

Best Euros Rates - Best Dollar Rates visit IMS Foreign Exchange

US in full-blown recession, It’s already too late today to stop it, and it’s now only a question of degree.

Foreign Exchange Currency Outlook : Attention is going to turn back to economic data once the debate and the passage of the Paulson plan are behind us. And it’s not a happy sight. The landscape is strewn with the dead bodies of once-robust statistics. Before mentioning specifics, let’s be sure to accept the idea that every financial crisis results in contraction of economic activity. The bigger the crisis, especially burst-bubble crises, the bigger the contraction.

This time we are talking about the restructuring of the US banking system, in quantity if not in quality. Most economists argue that a new model is needed, once that explicitly addresses policies and practices pertaining to risk. We probably won’t get it this time (unless government changes its stripes) and so the US economic contraction may lurch forward to minor recovery to another crisis within a few years. Since so many people think this way, it could become a self-fulfilling prophecy. It’s not at all clear that either presidential candidate, let alone Congress, has the chops to overcome the huge lobbying efforts of the financial sector and institute real regulatory change. They say government has failed in this regard, but what will they do? By late January, when the new government takes office, we will almost certainly be in a full-blown recession.

It’s already too late today to stop it, and it’s now only a question of degree.

On the road to acknowledging contraction/recession, we have evidence in the form of today’s factor orders, estimated down 3% in Sept, the most since August 2007, after a rise of 1.3% in July. Bloomberg reports that the forecast range is a drop of 6 percent to rise of 0.5%, meaning that the only favorable outcome is still a measly one. We also get durables, which are about half of total factory orders, probably a drop by 4.5% in Aug after an okay gain of 0.8% in July. But remember that transportation is a big chunk of durables. Ex-transportation, orders probably fell 3% after squeaking by with a 0.1% gain in July.

Friday we get the biggie, nonfarm payrolls. ADP Macro says the private sector component will be a loss of only 8,000 jobs in September, while the rest of the market thinks it’s more like 50,000. ADP mentions that the report may be skewed by two special factors, the Boeing strike and the two hurricanes.

Well, yes—it’s always something.

Despite the really bad news about to hit the fan, the US is still one step ahead of the Europeans, who are meeting Saturday but probably not to agree on a region-wide rescue plan. And the FIFO argument still holds, too, that whatever contraction we get, the US will come out of it first. We find these weak arguments for a strong US dollar exchange rate, but failure to disclose problems in the European banking sector weighs heavily, and Ireland’s action yesterday was very frightening in places like Spain. We expect the dollar exchange rate to stop making gains right around where it is now, at the historic low, until something new comes along to propel it further.

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Barbara Rockefeller - Forex Trading Reports

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Paulson is that rare animal in Washington, a can-do guy

Foreign Exchange Currency Outlook : Consolidation in the US banking sector has been on-going for over two decades, so mergers and acquisitions don’t necessary cause contraction in the sector. A liquidity and credit crisis does cause contraction, and contraction in turn causes recession. We have seen little sign of recession yet, just slowdown. That is about to change. Some analysts say that even when the House meets again on Wednesday night or Thursday morning, the Paulson plan will not get passed - and there will not have been enough time for major changes to have been made that would make it acceptable to those who voted against it Monday. Of course, Pelosi could grovel and change enough minds or some other political event could occur—the presidential candidates promising administrative office if the pro-plan members lose their elections, for example.

The latest word seems to be that the Senate Banking Committee's ranking Republican (Gregg) and Obama both said the plan will eventually pass; the FT reports that the FTSE 100 rose on the news.

Meanwhile, Bush will address the nation on TV this morning. TreasSec Paulson was visibly angry when he addressed the press after the vote yesterday, and it would not surprise us at all if Bush announces a series of initiatives that the Treasury can take immediately without Congressional authorization. It could tap the FDIC or other Executive-branch money pool (to buy equity or warrants), it could suspend mark-to-market, it could increase the size of swap lines with everybody for any reason, and probably a few other things.

It could even sell gold (gasp!).

The reason the House was involved in the first place is that this is where the power of the purse resides.

It’s called “revenue power,” but in the end, the Executive Branch can do (and has often done) an end-run around it. We can just imagine Paulson egging Bush on, like a coach with a sports team. Bush is likely to respond heartily to such macho stuff. Paulson is that rare animal in Washington, a can-do guy. Do we really think he went to bed last night or will sit around waiting for these childish bozos in the House? It’s a Jewish holiday today, actually a good time (in somewhat thinner markets) to take strong action. It’s also possible the Fed could cut rates, even inter-meeting, but nobody thinks that’s a good idea or an idea that would work.

This is the basis on which we imagine the US Dollar exchange rate could rise today. Foreign Exchange traders just love vigorous, decisive action from can-do guys.

They bought the dollar upon the US invasion of Kuwait and then the US invasion of Iraq not because they are a blood-thirty lot, but because they like decisiveness.

If Bush/ Paulson come up with a new initiative today, the US Dollar futures should go up.

If Congress comes up with a bill that passes tomorrow, the dollar could go up.

But we can’t count on it. This is just one more reason to stand aside and let the market gyrate on too much noise. Most retail forex traders can’t push the button fast enough to take advantage of warp-speed markets. A lot of professionals can’t, either. The one big mistake to avoid is thinking that sound macro analysis is a good basis for a short-term trade. It’s not.

The right timeframe for Foreign Exchange Markets today is 5 minutes, or maybe three.

Bye for Now

Barbara Rockefeller - Forex Trading Reports

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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

Best Euro Exchange Rates, Best Dollar Rates visit IMS Foreign Exchange

Bernanke - $700 billion injection of new money into the economy is not an inflation threat

Foreign Exchange Outlook : Bloomberg reports that Fed funds futures are pricing in an 80% chance the Fed will cut rates at the October FOMC, up from 58% only on Tuesday and 23% last week. Meanwhile, both the Bank of England (in the form of policy member Sentence) and the European Central Bank (various officials) continue to concentrate on taming inflation, chiefly in the form of keeping it creeping into wages. This dichotomy is disturbing, especially since Bernanke said yesterday that the $700 billion injection of new money into the economy is not an inflation threat (without also explaining how it will be sterilized).

Today the FT has a report on comments by German FinMin Steinbrueck, who told the German Parliament that the US will lose its status as the superpower of the world financial system. This world will become “multipolar” as stronger, better-capitalized financial centers emerge in Asia and Europe. “The world will never be the same again.” The FT calls it a “biting attack” on the US for having resisted urgent pleas for better regulation starting last year.

Crisis management alone will not rebuild the lost confidence. We must civilise financial markets, and not just through moral appeals against excess and speculation. Self-regulation is no longer sufficient.

The FT writes that he said The US belief in “laisser-faire capitalism; the notion that markets should be as free as possible from regulation; these arguments were wrong and dangerous,” he said. “This largely under-regulated system is collapsing today.” He pointed the finger at Washington for failing to take seriously proposals Berlin had made as it chaired the Group of Eight industrial nations last year. These proposals, he said, “elicited mockery at best or were seen as a typical example of Germans’ know-better attitude.”

“Unlike the US two-tier banking system, he said, Germany’s three-pillar system had weathered the storm. The network of savings banks, much derided in the past by US critics, had provided business with more credit in the first half of this year than in the same period last year.

“Mr Steinbrück put forward eight proposals to help resolve the current crisis and prevent future financial meltdowns on a similar scale. Among these were a ban on “purely speculative short-selling”; a crackdown on variable pay for bank managers, which had encouraged reckless risk-taking; a ban on banks scrutinising [sic] more than 80 per cent of the debt they hold; international standards making bank managers personally responsible for the consequences of their trades; and increased co-operation between European supervisors, culminating in the long term in a European supervisory system.”

Steinbrueck is an important guy and he has one giant germ of truth in here - that the absence of savings in the US made the banking system vulnerable to raising funds by inventing new classes of debt. It’s not really true that the German banking system is better than the US system structurally except for this aspect—but banks don’t get credit for it. Social norms and tax policy get credit for it.

German banking is notoriously inefficient.

Banks fail left and right.

The state-owned banks get special treatment, much like Freddie and Fannie used to get.

And Steinbrueck is wrong that the world is throwing the US away as the leader in favor of other centers in Europe and Asia.

Financial institutions in Europe and Asia have not disclosed their problem assets to the same degree as the US.

There is a lot of rotten paper in London and Frankfurt, hiding under the rug. And the preeminence of the US system is due in part to the size of the US economy but also to the rule of law (hello, India?), the primacy of individual property rights (yes, China?), and the freedom of markets from undue regulation. What? Yes. Even when the US is in full regulaotry mode, we have less red tape and regulatory burdens than in Europe and certainly less than in Japan. We also have a higher degree of greed, which inspires financial market innovation, not all of which is evil and unethical (the concept of CD’s, commercial paper, ATM’s, credit and debit cards, linked accounts, etc.—all invented here, not in Germany).

The US has much to be ashamed about now. In the 1930’s the chairman of the New York Stock Exchange (Whitney) was indicted and went to jail for stealing frm his customers’ brokerage accounts.

In other words, it was ever thus - the financial system running off the rails. But stupidity and cupidity are not solely American traits - think Herstatt. Think Barings. Think Mitsubishi.

In sum, we will get over this whatever the Congress and Treasury Secretary do and whether the recession is long or short. Three hundred million people are not going to go live in a cave and use barter to get food. The system is not broken beyond repair—it just has a big hole in it. Banking, with any luck, will become boring again as the hotshots and math whizzes go wreak havoc in some other field.

But to say the US will come out of this one day is not to help with the imemdiate US dollar forecast. While we have to expect a relief rally at some point, and perhaps very soon as Congress does the deed, the longer term outlook for the US dollar exchange rate is grim. And we still want to hear how Bernanke is going to sterilize $700 billion.

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Barbara Rockefeller - Forex Trading Reports

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