we have faith in the world’s ability to produce more bad news.

Foreign Exchange - Currency Outlook

The most important comment today is from IMF Director Strauss-Kahn, the former French finance minister. Going into G7 today, he said "The problem is that the effect on the real economy, for the most part, is still to come." All the talk of better financial market regulation (the focus of French FinMin Lagarde as well as US TreasSec Geithner) is certainly needed, but we don’t have a clue as to whether G8 or G20 can coordinate initiatives and polices to get the global economy rolling again. It looks like differing priorities and ideologies are getting in the way. Everyone has a stimulus plan but each is independent of the others because of domestic political considerations. We find it curious that Germany is the most reluctant stimulator. This could be because the German banking system is in dire straits, worse than we know.

Some say that improving conditions in the housing sector are the key, chiefly halting the rising trend of foreclosures.

We do not agree.

Housing is a critical component but fixing it, even if that were possible, is no longer sufficient. Now the focus needs to be on the banking sector. Quite apart from the question of whether banks should survive horrendous management mistakes and in what form, the modern economy needs the multiplier effect of fractional reserve banking. Like it or not, it’s the bedrock of all modern economies. It’s why the North Dakota economy is okay and the economy of (say) Kenya is not.

Let's not get into whether fractional reserve banking is an evil thing, as some self-described Libertarians and various nut-jobs say. Evil or not, it's the way the world works and has worked for nearly a century, and there is no viable alternative (and certainly not gold). For all of us to have incomes, let alone "wealth," banks must lend. Fixing the credit system is Job One. It comes even before better regulation, much as it pains us to admit it. It comes before questions of trade protectionism and the distribution of hand-outs. If the banks are not lending, economies will continue to shrink. The UK, somewhat ironically, has been the leader in prodding banks to lend, followed by the US.

If all we do is follow risk aversion as measured by US initiatives or stories about initiatives and the stock market's reaction to the stories, we'd have to guess that the US will continue to deliver good news. This is not a vote of confidence in the Obama administration but rather a reflection on the way things get done in the US—fast, and changing fast if the response is not favorable. The problem for us in the Foreign exchange market is that good news means a drop in risk aversion and thus in the dollar. The dollar benefits from safe haven inflows that are much bigger than what we see in the bond auctions or even the Treasury's capital flow report. It’s hot money with a holding period of one day. If the financial world decides to invest in (say) higher-yielding and still-growing places like India and China, the US dollar is the thing that gets sold.

Having said that, the contraction in European GDP today means the ECB will be cutting rates (while the US is done with that one). Paring positions ahead of G7 was always to be expected. A weekend announcement of yet another financial sector problem - possibly in Europe - could change everything back to a loss of appetite for risk - and it "should." We are not willing to abandon a trend that is clear on the charts and clearly backed by realistic economic analysis for a flyer on other currencies whose countries have yet to admit to structural economic problems. In other words, we have faith in the world’s ability to produce more bad news.

Euro Exchange rate last at 1.2867

Bye For Now

Barbara Rockefeller

Foreign Exchange Trading

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Pounds to US Dollar rate rallies as things are worse elsewhere

Foreign Exchange - Global Currency Outlook

For stock markets to rally, even a little, on hope of an okay payrolls number and an acceptable Geithner plan is the triumph of hope over experience. The reduction in risk aversion is premature. A few points - Geithner was the NY Fed president who helped design the original $350 billion TARP handout that overpaid by 25-30%. What makes us think he can do a better job only a few months later? To be fair, maybe nobody can do a good job but that’s not what matters. What matters is that markets are so tired of fear and more fear that traders are grasping at straws. A little greed feels like relief.

But it’s just wishful thinking.

For another thing, the Jan payrolls number is not the only data point that counts. The combined totals over several months (and historical revisions) matter, too, not to mention the rest of the first quarter. Feb is a short month but it won’t be until the first Friday in April that we see the scope of the job losses. We could have had four months of 500,000+ losses, or over two million newly unemployed. This is going to scare the pants off everyone, and rightly. The Obama simulus plan is supposed to save or create 3 million jobs.

Well, two-thirds of it is probably already gone.

Foreign Exchange Analysts blythely say that if the payrolls number is horrendous (say 650,000), the us dollar exchange rate is expected to rise on renewed risk aversion (and presumably send the yen higher again). But back in the sane world, bad payrolls on this scale are bad for the US economic outlook and it’s simply ridiculous to expect a huge disconnect like this between growth and the currency to be long-lasting. At some point, the US and the US Dollar have to be punished for bad results. If your economy is getting a grade of F, your currency cannot thrive for long.

Unless "things are worse elsewhere." And they are. We still have not heard of all the scandals teeming under the surface of the European banking sector. Some of the European economies are in worse shape than the US, which must mean defaults and failures are about to hit the fan. Moreover, Trichet and the ECB are having a "profound" discussion of liquidity traps and why inflation is still a big risk. This is fairly dumb. The US, for all its faults, actually looks better. Whne the messy, inadequate, politically screwed-up US actions look good relative to others, the world is in truly, deeply bad shape.

No wonder gold is holding on to gains over $900 and clinging to the top of its channel. Many forecasters agree that another run to $1000 is inevitable given the high degree of uncertainty in the world today - regardless of the dollar rising or falling. UBS. For example, see demand doubling in 2009 from 2007, chiefly on the long-term inflation outlook. We say this is facile and simplistic. We will get economic contraction everywhere with falling incomes and falling wealth. Inflation is years away, not weeks or months. If this perception gains traction, gold is likely to fade back to the linear regression on the perception that yield is a desirable thing in a near zero-return world and that liquidity is a priority and not something to be shrugged off.

As always on payrolls date, we advise you clean your desk today and not hold any Foreign Exchange positions.
This is a crapshoot, not high-level decision-making based on deep intellectual considerations. You may want to sell euros up around 1.2950 if the payrolls number is really bad on the expectation that the dollar exchange rate will gain on the day and into Monday. That’s a medium probability outcome but it’s still gambling.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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UBS, which repeated yesterday that the euro exchange rate will fall to 1.2000 by year-end.

Foreign Exchange Outlook : As we wrote yesterday, a decline was the euros manifest destiny even as it was rising last week because it was inevitable that the ECB would not stand apart from the rest of the world, clinging to an outdated anti-inflationary stance in a disinflationary world. This was and remains the persepctive of major Foreign Exchange market players like UBS, which repeated yesterday that the euro exchange rate will fall to 1.2000 by year-end. The forecast itself from such an important name becomes a factor in its own right. Even if the ECB stays on hold or cuts by only 25 bp, the bank says, expectations of cuts next time will get built in. "Thus the euro rate is likely to remain a sell on rallies against both the dollar and the yen."



We say this is exactly right.

We expect an ECB surprise on Thursday. ECB chief Trichet said "this is no time for complacency." The current challenges are pressing and new challenges will arise. He was (evidently) talking about a "firm and credible implementation of the EU stability pact," i.e., fiscal restraint, but Trichet is a really smart guy and he must know that to complain about overspending (Germany will break the pact in 2010) is spitting into the wind. We expect Trichet to make some critical comments accompanying the rate decision.

In the background is some chatter, mostly from the lunatic fringe, about some countries being forced to leave the EMU (Italy, Greece, Spain, Ireland are the most-cited names). We say it's much too early to be thinking along these lines, let alone making trading decisions based on such speculation.

For one thing, there is literally no mechanism for a member to leave the EMU.

Nobody knows how that could be accomplished. Having said that, there is an explicit deal that the EMU will not rescue a failed member, either. This is not so odd - New York State doesn't have to step up and rescue Massachusetts, either. Still, stress on certain names is generally euro exchange rate negative, although Bank of New York economist Woolfolk says that a weak country leaving the EMU would be a euro exchange rate positive. Well, no. While pan-European integration has hardly been a full-scale success, leakage from a failed economy could be substantial, from loss of export sales to immigration. We think the EMU would indeed come up with a rescue plan… but for whom? Spain yes but Greece no?

Back in the broader market, there's almost too much data this week to keep it all straight, but we must pay attention to Bernanke's speech at the London School of Economics today. But again, it almost doesn’t matter what he says because "it's worse elsewhere." See all the grim data above in the UK, Germany, Spain (ratings). We have the secret weapon of Obama, of whom far too much is being expected… but he is our secret weapon all the same.

Nobody else has an Obama.

Nobody else has a federal structure, either.

And finally, nobody else is willing to experiment as wildly as the US, badly managed as it seems to be. Keep the faith - the US dollar exchange rate is on a roll.

Note to Readers: Next Monday, Jan 19, is Martin Luther King Day and a national holiday in the US. The market is closed and we will not publish any reports. The next day is the Obama inauguration, yippee.

Bye For Now



Barbara Rockefeller

Foreign Exchange Trading

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The Big Event, however, is the ECB rate decision on Thursday.

Foreign Exchange Outlook : We get a ton of data this week, as usual for the second week of the month. The Big Event, however, is the ECB rate decision on Thursday. So far the ECB has been reluctant to acknowledge the extent of the likely downturn, let alone the vastly deflationary forces at work. It has also put forward a face of "we know better" that is starting to look less convincing with every data release. Logically, there is no way Europe can avoid contamination from the US and UK, as Ireland just found out with the withdrawal of Dell and its several thousand jobs, or German manufactuers of industrial equipment suddenly seeing Chinese orders fall off the cliff due to demand destruction in the US.

We normally get an odd pattern of currency market responses to upcoming rate changes, as we just saw with the UK pound and the BoE decision. Often a currency rises ahead of the decision, which is counter-intuitive, and doesn't fall until afterwards. This time it looks like the euro exchange rate is going to fall, perhaps overly so, ahead of the decision (suggesting it might rise on the Event itself). The ECB has nobody to blame but itself. As BoT-Mitsubishi analyst Halpenny says in the FT today, "We maintain that the financial markets remain much too optimistic over the ability of the eurozone authorities to manage the current downturn. Lack of coordination on fiscal policy and evidence of strains within the EMU will undermine the euro exchange rates."

Merrill Lynch says the forex traders would buy euros if the ECB decision not to cut rates but it would be short-lived. We say "short-lived" is a euphemism - it would last all of ten seconds. In other words, the euro rate is going to fall no matter what the ECB does. It is in a no-win situation, unless you consider that a falling currency is desirable (which of course it is, today).

As for the economic claendar, it’s enormous--the Nov trade deficit tomorrow and the TICS report on Friday. We also get retail sales, the Beige Book, the Empire State and Philadelphia Fed indices, Dec CPI and industrial production, and the University of Michigan consumer sentiment for Jan. We also get the Federal budget deficit and the World Economic Forum's Global Risk report for 2009. Stock market guru Sandi Lynn adds that the U.K. ban on short selling financials ends this week, too.

Sometimes of more importance than the data is the rhetoric. This week we get Feds Lockhart, Bernanke and Lacker along with Congressional hearings on Obama’s cabinet nominees. We say the public and markets are still in a state of shock over the developments since last March when Bear Stearns lost its way and September when Lehman was allowed to go under. Goldman Sachs chief economist O’Neill says the Goldman financial distress index is actually a bit better, mostly on activist policy proposals, but with fresh bad news sure to be coming, this is probably the calm before the storm. Such a perspective is also a dollar - favorable perspective ( buy us dollars), since severe distress is dollar-favorable on the safe-haven thesis.

Bye For Now

Barbara Rockefeller

Foreign Exchange Trading
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Thursday brings the first hard evidence of recession in the US in the form of the official Q3 GDP, probably a contraction of 0.5%

Foreign Exchange Outlook : Today seems to be a bit of calm before new storms, and do not doubt for a minute that new storms are coming. We have the probable bailout of the auto companies. We have potential currency and stock market intervention by Japan, Hong Kong, and others. More immediately, we have the Fed cutting rates-or not-this week, with the Bank of Japan on Friday probably following suit. In the current environment, he who cuts rates gets rewarded, not punished. Trichet already said the ECB will join. A major question is whether it’s a joint decision like last time. The markets seem to like coordinated action. A coordinated rate cut would (ironically) be US dollar-negative, because it would imply that somebody is in charge and knows what he’s doing. There isn’t and they don’t, but that would be the knee-jerk reaction.

Thursday brings the first hard evidence of recession in the US in the form of the official Q3 GDP, probably a contraction of 0.5%. The actual number doesn’t matter as much as confirmation of "recession," now no longer the official two quarters of contraction but pretty much whatever the speaker or commentator chooses it to be. The poor NBER-it lost its preeminence on this one after failing to name the last recession until after it was over.

Next Tuesday we have the US election and right afterwards, on Friday, the nonfarm payrolls for October, probably a lot more than 100,000. This week and forevermore we have massive new Treasury issuance. Meanwhile, the commodity bubble continues to deflate and China inches closer to the same global slowdown affecting everyone. The political fallout everywhere from worsening conditions trends to be authoritarian—keep the peace at any cost.

The only thing really supporting the US dollar exchange rate is flight-to-safety and panic selling of emerging market and commodity assets, whether forced by de-leveraging or by choice. This is not over and therefore we assume the dollar rally is not over. But boy, the rally faces a lot of threats, even bottom-fishing among the newly cheap assets. Keep the faith and watch the charts-the instant an intermediate top is seen in the euro exchange rate, we can buy dollars in size some more.

Buy For Now

Barbara Rockefeller
Forex Trading Reports

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The dollar could dive a lot early in the week, especially if oil rallies as it appears likely to do

Foreign Exchange Outlook : The US may have lost some of the shine off its FIFO standing by having dithered a little, with Paulson changing his mind about direct investment in banks instead of just buying paper, now that the UK led the way with a big 3-part plan pretty much accepted by the rest of the world. What the US has that the ECB does not have is the ability to support the corporate world directly by buying/backstopping commercial paper. Other central banks have to keep the banks funded and hope they lend to the players in the real economy. Cold, hard cash is always nicer than hope in a panic.

On the whole, the US has better recuperative powers than other economies, so the FIFO story is not gone and forgotten. And the US has some problems that other economies do not have, namely Detroit and a discouraged consumer who is two-thirds of the economy. Germany, to take an example, can stimulate exports with subsidies and tax breaks. The US doesn’t have that option—does it? Don’t ever think this is not a competition. It is certainly viewed as a competition in Europe, if not in Washington. We laughed until it hurt upon reading the first report that the combined European rescue plan is $1.4 trillion, exactly double the US number. You can just imagine those guys sitting around saying “That’ll show ‘em who has guts.” (The dollar amount of the combined European plans keeps changing in each report, but it’s true that it’s roughly double.)

As for the inevitable recession, pundits are now saying that the probability of a Depression has receded to a low level now that governments have acted (and the stock market voted them good guys again, at least for a day). Business Week says the recession will likely be long but mild. Past recessions since the War lasted 10.4 months, cut 2% from GDP from peak to trough, and unemployment rose about 3%. It’s interesting that inflation (ex food and oil) always falls in a recession. In retrospect, the NBER will probably date the current recession from Dec 2007. If it runs 16 months to April next year, that would put it on a par with the recessions in 1973-75 and 1981-82. If we consider what was going on in the world during those earlier recessions, especially the oil crisis in 1973 (and subsequent floating of the dollar), maybe what’s happening now is not that much more of a shock. After all, Warren Buffett was not the only doom-sayer. Plenty of people, including new Nobel laureate Krugman, said the housing bubble could have disastrous consequences. So let’s say the US loses 2%--we would still have growth around 1.5% by the middle of next year. Europe will be lucky to get 1%.

We’re not so sure that this recession is not different in some qualitative ways even if in the end the economic data puts it in the same class as other recessions. For one thing, the moral dimension is far bigger, broader and deeper. Individuals behaved badly. Banks and mortgage brokers behaved badly. Investment managers behaved badly, buying pie-in-the-sky stories from quants. Governments and their regulators behaved badly. The Fed behaved badly, if you accept that Greenspan’s Randian fantasies overruled common sense. If you cut interest rates to 1%, you need to take other steps, chiefly regulatory, to avoid abuse. How can the Rand/Greenspan libertarians not see that avarice is a powerful and anti-social thing? It’s not healthy for a society that so many people turned a blind eye to lying on mortgage applications and mortgage approvals. Subprime may be only a small portion of the overall problem but it’s a pernicious disease. In the old Soviet Union, there was a joke that “the workers pretend to work and the state pretends to pay them.” In the US, we have a similar joke—“we pretend we are rich and the banks and brokers pretend to believe us.”

Now the US faces a moral dilemma of the highest order—the government will decide which financial institutions will survive and which will not. Capitalism is not supposed to work this way, but that’s not even the main point. This is how we’re doing it for the sake of expediency, so let’s accept it for a moment. The question then becomes HOW will the government decide who survives and who does not? The opportunities for fraud, corruption, error and injustice are nearly endless.

The other moral component is the punishment to be meted out to the miscreants. In Europe, executive heads are going to roll-that has been the sentiment all along and was featured in German FinMin Steinbrueck’s 8-point list of prerequisites for rescue plans. So far we have heard that the Royal Bank of Scotland CEO was given his walking papers, with no golden parachute. TreasSec Paulson has said he disapproves of government dictating executive pay, but these are not normal circumstances. He who pays the piper gets to call the tune, right? And it’s not just jettisoning the top executives. The public is pounding on the table for some of these guys to go to jail, certainly not to be allowed to stay in their jobs at high pay. Presumably we can spare them with over 100,000 former financial sector workers on the street and a great sector consolidation about to begin. Alas, we fear that the only charge available will be “stupidity” and you can’t send a guy to jail for that (can you?). When it comes to the moral outrage issue, it looks like the British and Europeans have a firmer grasp on the concept of the social contract that says people fortunate enough to rise to wealth and high social status are duty-bound not be to greedy cads.

But back in the real world of money flows, we need to note two developments. The first is that bond yields everywhere will be rising as governments issue new paper to fund the bailouts. Even if the US, UK and Europe engage in additional interest rate cuts on the very short end, the yield curve must steepen as new paper comes along. This is also a competition for the world’s savings, and as we know, the world’s biggest savers reside in Japan, China and other emerging markets. What about Middle East sovereign funds? We are getting silence on that front.

Panic and blood on the street always causes hot money flows. Market News reports a fascinating development, that during Sept, capital flowed out of China. “Foreign exchange reserves hit a new record of $1.906 trillion at the end of September, up about $98 billion from the $1.808 trillion at the end of the first half. But a monthly breakdown of the quarterly increase suggests an estimated $20 billion to 25 billion left China in September, according to Stone & McCarthy…. The $21.4 billion increase in September --much smaller than the combined $29.3 billion trade surplus and $6.64 billion foreign direct investment during that month -- could raise the spectre of capital outflows, rather than the inflows that the government has long been concerned with.”

Exactly whose money is this? It could be private individuals, including wealthy Chinese and some living outside the country, who expected the crisis to spread to China, or it could be corporate money going home in the Western credit crunch. Remember, there’s a lot of Japanese money in the Chinese stock market, too. In a related matter, some analysts say the dollar exchange rate could be the beneficiary of repatriation flows for the same reason. How much money does (say) GM or GE have in China?

We expect the dollar exchange rate to seesaw early in the week as we await the market’s judgment on the various bailout plans. So far analysts are impressed by the Europeans lacking the institutional infrastructure to create a clear and coordinated master plan. We say this is wrong. It is a huge plan when all the pieces are put together and there is no reason it won’t work just as well (if not better) than a eurozone-wide plan. And the US plan to be announced in more detail today has many potential pitfalls. The dollar could dive a lot early in the week, especially if oil rallies as it appears likely to do. But by the end of the week, if real confidence is restored, the US dollar can come back on the FIFO growth story. We hate to say it, but we must watch the stock market as the symbol of sentiment.

Bye 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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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.

Buy for Now

Barbara Rockefeller - Forex Trading Reports

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The response was needed because conditions were dire. Conditions are still dire.

Foreign Exchange Currency Outlook : We are very happy to see the Treasury and Fed taking a vigorous initiative. We are even happier that it’s a comprehensive approach to “systemic” risk and not the one-by-one approach of the past few weeks. A lot has happened in just two weeks, the failure of Freddie and Fannie, Lehman, the break-the-buck money market fund, and questions about Morgan Stanley (about which the Chinese may feel “it can solve its own problems,” according to one report today).

The market is happy to see such a vigorous response, too. With stocks rallying everywhere and the US dollar reversing direction, things sure look good today.

But wait a minute.

The response was needed because conditions were dire.

Conditions are still dire.

The rescue plans have not yet been tested and found sufficient. What other terrible thing can happen that is not foreseen today? While nobody expects Congress to pull back from any of the plans, the fact remains that the government is about to commit to nearly $1 trillion of money that it doesn’t actually have. Unlike the Resolution Trust situation, where the government had already seized the S&L’s, this time the government has to go out and buy the toxic assets from the current holders. Nobody knows what the price is or should be. Sounds like Russia when it opened markets for the first time… and the oligarchs began to emerge, the very essence of crony capitalism. This problem will become severe as buyers start to emerge. Will there be favoritism? Just as some make a fortune on short-selling before the SEC finally stopped it (and note that the ban on short-selling ends in Oct-and Jan in the UK), are some players getting preferential treatment?

This is a nightmare of imputed sovereign risk.

And what will be the price and yield of the new paper the US will have to issue to backstop the new entities and plans? As we wrote yesterday, the US will have to pay a premium to get the money. Rising yields are usually good for a currency but you have to consider the context. The US is forced to sell paper but buyers are not forced to buy it (unless the State Dept is twisting arms behind the scenes in China and the Middle East, which wouldn’t surprise us at all).

In short, it’s still a crisis and it’s a crisis home-grown on American soil.

It’s a little premature to say the dollar is going to come out of it unscathed. Watch gold (and as always, oil) today. If the recessionary tendency (and deflationary tendency) proceed as expected, oil should resume its decline and that is US dollar supportive. But if fear is not banished, gold will hang on to gains. It’s a symbol, perhaps, not an asset class into which intelligent people put capital, but still—it’s not without meaning. Be still feel quite fearful. We doubt the dollar can make a full recovery—but it’s still early, and we have a lot of confidence in the brainpower and willpower of Bernanke and Paulson. At a guess, we will want to go into the weekend square, unless the chart shows something compelling after the close today.

Friday’s are important.

Bye for Now

Barbara Rockefeller

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