Tuesday, June 06, 2006

 

US Dollar: King For Day?

The Financial Times looks at the new interest rate landscape. "Susan Bies, Federal Reserve board governor, on Tuesday joined a chorus of central bank officials expressing concern over rising inflationary pressures. 'We're in a period of transition, and transition means we don't exactly know where we are going to stop,' the governor said. She added that a rise above 2 per cent in the core rate of inflation, excluding food and energy, made her 'uncomfortable.'"

"Over the past week there have also been hawkish comments from William Poole, president of the St Louis Fed, and Michael Moskow of the Chicago Fed."

The Canadan Press. "The Canadian dollar was down sharply Tuesday amid shaky domestic economic data and an indication that American interest rates have farther to rise. The American rate outlook 'is creating uncertainty in the financial markets and that's a bad thing,' said Andrew Busch, global market strategist. Busch added that negative Canadian data also worked against the loonie."

"Canada's dollar fell for a second day as metals including zinc, gold and copper declined, reducing the appeal of the currency. 'It's difficult to find some support for the Canadian dollar after Bernanke's comments,' said Francois Barriere, vice president of foreign exchange services at Laurentian Bank in Montreal. 'It supports the fact that we might export less to the U.S., and the fact that the interest-rate spread favors the U.S. dollar even more.'"

"The U.S. is Canada's largest trading partner, consuming about 85 percent of the country's exports, including natural gas, crude oil and lumber."

"Crude oil for July delivery fell 10 cents to $72.50 a barrel. Natural gas for July delivery fell 14.3 cents, or 2.2 percent. Gold futures for August delivery declined $14, or 2.2 percent, to $634.70 an ounce."

"Copper for delivery in three months fell $250, or 3.2 percent. Zinc fell $130, or 3.6 percent, to $3,460 a ton and nickel declined $500, or 2.3 percent. Since reaching a record on May 11, copper has plunged 17 percent and zinc is down 14 percent."

"'You may see another round of slides in metals this week,' said John Kemp, an analyst at Sempra Metals, one of the 11 companies that trade on the floor of the London Metal Exchange. 'Bernanke's comment was quite hawkish on inflation.'"

"'The Fed's gone all hawkish on us,' said Scott Ainsbury, who helps manage about $12 billion in currencies at New York- based FX Concepts Inc. 'The dollar's king for a day, maybe a couple' of days, Ainsbury said."

"The dollar strengthened to $1.2836 per euro at 3:41 p.m. in New York, from $1.2906 late yesterday, the biggest jump since May 17. The U.S. currency touched $1.2979 per euro yesterday, the weakest since May 5, 2005. It climbed to 113.21 yen today, from 112.24."

"The U.S. currency may advance to $1.26 per euro this week, Ainsbury said. South Africa's rand reached a seven-month low of 6.81 per dollar, and the British pound dropped 0.5 percent to $1.8621. The U.S. currency is still down 7.7 percent this year versus the euro on speculation the Fed will lift rates more slowly than the European Central Bank."

"The comments from Poole were 'gasoline on the flames, helping to underpin the dollar,' said Scott Schultz, a currency trader at Brown Brothers Harriman."

"Inflation is at the 'upper end' of his comfort range, though it should 'taper off,'' Kansas City Fed Bank President Thomas Hoenig said today in a speech in Colorado. The dollar remains the world's reserve currency, and there are no signs it will be replaced, Hoenig said in response to a question."

Comments:
This turn of events has been sudden. I'm wondering if some of the computer models the Fed uses started spitting out worrisome numbers. How is facing an inflationary recession good for the US$?

For the thrill-seekers out there, here is an article on Iceland:

'Foreign Minister Geir Haarde will be Iceland's new prime minister, a government official said today, and analysts forecast few policy changes in spite of fears of an overheating economy. Foreign investment in new aluminium smelters and power plants as well as financial deregulation has boosted economic growth for the North Atlantic island of 300,000 people, which was formerly dependent on fish.'

'However, inflation has soared and the trade deficit has widened, prompting warnings of a crash by analysts and rating agencies. The Icelandic currency, the crown, has plummeted this year.'

'Olafur Hardason said Mr Haarde, a former finance minister, would stick to the liberal economic policy of his predecessors. He had to face the concerns of Icelanders about the economy, but had little room to manoeuvre.'

'I think people would be very worried if inflation really got going so there is a pressure on the government to do something to prevent that,' he said.'

'They have been increasing interest rates in the central bank and many people have said they should cut public spending, though that might be tricky as we have an election next year.'

'Inflation hit 7.6 per cent annually in May, worrying many in Iceland which has seen bouts of hyper-inflation in the past, and the central bank has pushed interest rates up to 12.25 per cent.'

'The Icelandic crown fell about two per cent on both the euro and the US dollar after the S&P news overnight while the blue chip share index fell 1.5 per cent'
 
The fed has the power to scare, and the media is happy to spread the message. The people with power have an interest in keeping the financial juggling act going. It doesn't benefit the people, of course, but why cares about them? They only elect the officials and pay the taxes. Powerful interests want to support the dollar, but they can't do it forever. No fiat currency has stood the test of time.
 
if you use the shadow gov't statistics numbers for inflation, Iceland is only 1-2 percentage points higher than our inflation rate. where would that put our interst rates? in economic crash mode!
 
As it stands I'm convinced the Fed is going to overshoot the mark. Consumer spending is very tightly bound to housing prices right now, and the cyclical housing market typically cools in September/October. Combine the cyclical trend with another rate hike and my guess is we'll see some serious downward acceleration in housing prices this Fall. (On top of that there's the off chance we'll have another category-5 in the Gulf in the next couple months, which will jack gasoline prices up through the roof). Not only is consumer spending going to get pummeled, but we'll be hearing cries of financial anguish from middle America right before an election -- putting a whole lot of pressure on the Fed to rethink this strategy.

For now, the markets seem extremely confused. Stocks are selling off because of inflation fears, and precious metals are selling off because of perceived future hawkishness.

Crazy times...
 
I don't think the Fed will overshoot. here is why. people who calculate an honest rate of inflation have it going at almost a 6% rate. don't they usually have rates a point or two over inflation? so the fed funds rate should be 6% or 7%. that's not going to happen. the economy won't be able to deal with it.

I understand the overdoing view, but my view is that the point at which bernanke is overdoing it is a lot lower than where interest rates should be.

this article from puru is good.

END OF CHEAP OIL!
 
I read an article by Cnn/Money that said now was a good time to invest in Gold so I did and now I've lost $56,000. Shit. Now what should I do??

LMFAO!
 
It does appear, as others have said, that there's more than one "neutral" point for interest rates. I would not want to be Bernanke now.
 
IMHO, the Fed no longer has control of the steering wheel, only the throttle. Will be interesting to see the short-term effect on PMs, though.
 
Jdog,
My prescription for your buyer's remorse:
1. Re-read the articles I linked last week for you.
2. Remind yourself that the Fed has lost control. All of this obsession over the Fed Funds rate is a distraction.
3. The real issue is the US budget deficit and current account deficit, massive consumer debt compounded by a housing crash (currently underway), $65 BILLION per month trade deficit, etc.
4. The only solution to a global systemic crash as a result of massive debts (see #3) is massive reflation, or else the result will be a serious global depression.
5. Gold is your hedge, and will survive the coming financial upheaval and make you a very wealthy man.
6. Repeat the words "debt, debt, and more debt" every time you start feeling blue, or go read past articles from the Mogambo Guru. That always helps. If you haven't read "Empire of Debt" please do so.
 
Fred I was being sarcastic. No buyers remorse here.
 
I'd be interested in hearing some apolitical opinions of Dems retaking House or Senate and how that might impact the markets and PM's. Haven't seen any commentary at the usual sites.
 
Fred, I agree with your points, especially regarding the Fed having lost control. The fact that people still base investment decisions on what the Fed does is amazing. The Fed creates bubbles and then aggressively tries to deflate them. It would be comical if it wasn't so destructive.

European CBs may raise by a half-point tomorrow. It's a race to see whose stock market collapses first.
 
the krona is down 30% versus the euro.

Iceland’s new PM urged to cut spending

I guess this is what hot money does in a small market.

(foreign observers argue that the currency was at least 20 per cent over- valued in the first place and that the correction was a necessary one.

They add that the severity of the decline was fuelled by money lured to Iceland by the carry trade, which involved borrowing in low interest rate environments such as Japan and investing in Iceland.

These short-term investors – such as hedge funds – exited Iceland in a hurry following the Fitch report, exacerbated the decline of the currency and made other investors nervous, which in turn added to the selling pressure, they said.)
 
I'd be interested in hearing some apolitical opinions of Dems retaking House or Senate and how that might impact the markets and PM's. Haven't seen any commentary at the usual sites.
# posted by fred hooper

Good question and a huge wildcard in the whole equation and the #1 biggest factor in my bullish take with gold.

My hypothesis is the whole flood of money has been created to specificaly give the economy a burst , kinda like a junky doubling up on that does of heroin, so that come election time the Republicans along with Bush can say..."hey, the economy is great. We are in full employment" and the sheep are going to buy it. They look around, and see that they have more money and fancier cars and toys then they have ever had.

That will probably work for this years election, but the ultimate goal is to keep up the charade going until the 2008 elections...problem is, thje only way to do that is by printing up some more $$. As a result gold rises even more.
 
I've tried to post a couple of times today; no luck. Please check back.
 
Mogambo Guru: "blargh argle bargle grrr!! buy gold! argh gnash blah blah blah!"

right, I got it, thanks, you can stop hitting me over the head now.

the general odor of things is that PMs will be sideways for awhile. I'm just repeating what I've read elsewhere all day (slow day at the office). thoughts?
 
Here are my dots, so connect as you see fit.

Who knows how much money/debt sitting in the form of MBSs bought by people who really have no clue where they are putting their money other than a mutual fund.

Literally trillions of dollars floating around foreign countries using it to buy oil and bonds.

Housing debacle unwinding in the US and the rest of the world.

Banks with unknown amount of risk to mortgages and unknown amount of reserves (sure they state what they have, but so did Enron, REFCO, etc).

Americans still, (by and large since most alive have never witnessed anything else), have faith in the dollar. As foreign gov'ts move away from the dollar, those dollars are coming back, big time. It's going to make it real tough to fudge inflation as foreigners start demanding a lot more of our falling dollars to purchase their oil/goods.

When faith is gone, what else is there? If the folks running this fiasco can somehow pull a rabbit out of the hat, folks won't turn to gold /silver. If they can't, then these prices could be the cheapest we'll see for at least awhile.

It appears to me that there are a lot of folks beginning to lose some faith, and that is all that's holding it together.

Personally, I think that if the FED pauses anytime in the near future, gold/silver will skyrocket. I wouldn't be surprised if the FED is closely watching the price of gold/silver. That is about the best indicator I can see of people's faith. Gold is declining since he is talking like he will raise rates as high as needed to curb inflation. I think it's talk only. That will cause deflation after massive defaults on home loans which will take liquidity out of the system (since raising rates doesn't by itself do that...but sure makes it harder to pay off an ARM).
 
It's going to make it real tough to fudge inflation as foreigners start demanding a lot more of our falling dollars to purchase their oil/goods.


I think you're missing something in your analysis, kerk. As you correctly pointed out, a housing bubble is unwinding. That means that the housing ATM is being shut down quickly. Furthermore, homeowners are starting to get hit with adjusting ARM payments, and gas prices have gone up. All of this means that consumers have got much less money to spend on Chinese-made consumer junk. Now let's look at what China's got -- enormous production capacity, built out to satisfy a HELOC-fueled spending frenzy. As American consumers retreat, China's going to have a great deal of excess capacity, and that's deflationary. Who else is going to step in and replace the demand? If America goes into a recession, the rest of the globe is coming with us. Foreigners aren't going to demand more from us for their goods, they're going to beg reluctant U.S. consumers to buy them.

On a different note, I was driving a rental car in Atlanta today, listening to a talk radio show (Michael Medved) and I heard an ad that said, "Call now to find out how you can own gold!" The cab drivers have arrived.
 
(The cab drivers have arrived.)

yeah, good try though.
 
If America goes into a recession, the rest of the globe is coming with us.

Exactly why PMs will be the only surviving currency!
 
Evidently they finally caught up with Al-Zarqawi, and the price of oil has already dropped just below $70 a barrel. I'm guessing when the spot market opens, we're going to see a drop in PM as well?
 
Exactly why PMs will be the only surviving currency!


tj, I think there are some good reasons to invest in PMs (when they're not in a bubble), but an expectation of gold becoming the world's currency isn't one of them. I think that the debates we have on the merits of a gold standard are good hypothetical debates, but they're exactly that -- hypothetical. There is virtually no chance that the world economy is going to revert to a gold standard in our lifetime.
 
Don't fight the Fed.

Interest rate trend is not very friendly to gold right now.
 
There is virtually no chance that the world economy is going to revert to a gold standard in our lifetime."

Even if you are right, it may not matter. If governments refuse to work on a gold standard, and people refuse to take their currency in exchange for goods, what do you have? Gold will be the default standard; having it means being able to trade at a great advantage. If I am a Saudi and I can sell my oil for gold bullion or rapidly-depreciating paper, which trade will I make? That's a default gold standard.
 
Don't fight the Fed.

My thoughts exactly. Fed has the commodities bubble in its crosshairs because it's creating inflationary pressures and the Fed is not as powerless as some would have you believe (as validated by the reaction of the world's major markets this week).

If governments refuse to work on a gold standard, and people refuse to take their currency in exchange for goods, what do you have? Gold will be the default standard; having it means being able to trade at a great advantage.

Come on, gofast. How do you use gold as a currency if governments refuse to adopt a gold standard? Explain how you would buy a loaf of bread using physical gold. Supermarkets are going to have scales and people are going to carry around small bags of gold nuggets?
 
There is virtually no chance that the world economy is going to revert to a gold standard in our lifetime.

I didn't say that it would. Human nature & history almost guarantees that fiat currencies will rise and fall over and over again. I'm just saying that the current fiats will fail, just like they always do.

Throughout everything, PMs soldier on as the only "real" currency.
 
...the Fed is not as powerless as some would have you believe...

Only in the short term. IMHO, they're simply rearranging the deck chairs on the Titanic.
 
This comment has been removed by a blog administrator.
 
Explain how you would buy a loaf of bread using physical gold. Supermarkets are going to have scales and people are going to carry around small bags of gold nuggets?


Why not? You sound like a housing or stock market permabull. "Things will never change, people don't use PM's as currency now so they never will."

Anybody with 3rd grade math skills can figure out the value of silver and gold bullion, U.S. 90%, or any other readily available sources of PMs. Why couldn't ordinary people use them as everyday currency?
 
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