Wednesday January 16, 2008 - 13:25:57 GMT
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Black Swan Capital - www.blackswantrading.com
Best of Bad Choices?
FX Trading â€“ Best of bad choices?
The worldâ€™s central bankers (CBs) are well aware of the evil; itâ€™s the global credit crunch and contagion associated. The contagion is gobbling up real money and wealth; itâ€™s beginning to eat away at confidence in both the financial and real economy spreading. Yesterdayâ€™s plunge in the market is a prime example.
After the release of poor retail sales numbers yesterday morning, many of the stock guys, and I, expected the Fed to step in and do the deed it said it was willing to doâ€”cut rates if the data got worse. But by mid-morning, Mr. Bernanke & Co. found better things to do so Mr. Market decided to take a dirt napâ€”risk aversion and all its glory was back on display.
At this stage of the game, it might be that fear and rising negative sentiment could play a much bigger role going forward than the real financial impact (that is not to say the financial impact isnâ€™t huge). It is to say the negative sentiment, and loss of confidence in the system, will magnify many times over the real financial burden and denude any attempts at some type of rescue. That is what the CBs are facing. They know the problem is much bigger than the resources they have to solve it. But they also know that can do some things to at least enhance confidence. Yet, the Mac-Daddy of central banks, the Fed, is stalling. Very strange indeed!
All that said, we know the Fed is facing series of choices, all of them have their flaws. We are no fans of the Fed. Their constant meddling is what causes such extremes in the cycle in the first placeâ€”as they continually quest for the elusive â€śneutralâ€ť rate of interest and continue to get it wrong resulting in the wrong signals being sent to the area that matters mostâ€”the entrepreneurial class. But thatâ€™s a dissertation for another day.
The choice now seems simple: give the market as much relief as possible. The yield curve is inverted and credit spreads are still in the ozone. Time to act even if bubble-ology and â€śheadlineâ€ť inflation might suggests otherwise. For if the players lose confidence in the system, this so-called inflation scare will morph on a dime into a massive deflationary spiral as debt is repudiated everywhere (we noticed gold is down $16 bucks this morning and oil is still heading south).
Coming clean with a cool $18 billion yesterday from Citigroup represents only the tip of the iceberg. We still havenâ€™t heard much from the 3,000+ hedge funds, thousands of them quant fixed income related. Thatâ€™s another shoe waiting to fall.
As we wrote yesterday, the yen loves risk. It is the risk thermometer currency and its thriving. Can you say 100? If the Fed doesnâ€™t move, it could get there fast.
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