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Thursday November 4, 2010 - 17:16:13 GMT
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Bernanke Fed Underwrites Stocks, Foreign Currency (FXA)

Bernanke Fed Underwrites Stocks, Foreign Currency


Never did I think a Fed Chairman would admit to designing monetary policy to boost stock prices.  He did just that this week and for those in retail space sitting with their legs crossed and hands over their heads in cash and bonds, he told them in the Washington Post today to do what hedge funds are doing…buy equities.  Forget the life cycle hypothesis and 100 minus age for share of equities…the age side of the equation was made zero by Bernanke…even if you are 80.  As CNBC’s Cramer (he really looks like Vladimir Illych Lenin) would say, buy buy buy!


I also never thought I would see the day when the USD would be thrown under the bus as happened Wednesday at the conclusion of the FOMC (well I did see it coming…I just did not want to believe it).  While Bernanke never said he also welcomed a lower dollar that comes with printing money (export kicker and inflation channel) it was there for everyone to discern and requiring no PhD in economics to understand. 


And again today we were left with the ECB President Trichet to articulate the US dollar policy for us…this has been happening for the last few Governing Council press conferences and after G20 ministers meeting in Gyeongju in late October.  He said he strongly trusts US officials who has assured that the US is not pursuing a weak dollar policy and that they believe a strong dollar is in the interest of the US.  Okay Geithner said the US is not devaluing and major economies’ currencies are in equilibrium, he has not uttered the USD mantra since February and there were no public remarks at G20 ministers last month to dissuade markets from accepting the Fed’s implied invitation to sell dollars.


Treasury is surely thinking plan B in the event the dollar’s decline gets disorderly.  But it is also quite happy to let an orderly decline unfold (not sure it has any options in face of QE2 and more presumably if the economy continues to underperform) to pressure the likes of China and Asia X-Japan to revalue. 


So the G20 heads of state summit set for Seoul November 11-12 and the follow-up meeting to the Pittsburgh summit of about a year ago (which at the time was seen as a success) is very likely to be the start of what Mantega from Brazil would call a currency war.  China has lots of allies now on US adjustment strategy and will not see much additional pressure to allow for a more rapid yuan rise.  And with most at G20 calling for measures to stabilize the dollar, the only thing the US government has to show for itself is the potential for the post-mid-term Congress and White House to develop a deficit reduction plan (Republicans demand it be implemented immediately, after extending the Bush tax cuts, and White House and Democrats are going to insist on medium-term plan which Bernanke is on board with and also eager to have more near-term fiscal stimulus).  I don’t think the market is going to reverse USD trend on a vague plan to reduce the deficit.  Obama has a bipartisan committee working on this and will report back by December 01…look for the Republicans to call for this process to start over with the likes of Rep Ryan participating for the GOP.  So we are probably looking at the new Congress (after January) before the process begins in earnest and concludes probably in the spring.


Where else could the dollar decline hit more headwind?  Not Ireland.  It is going the way of Greece…to the EU-IMF bailout fund and when Greece did this the EUR stabilized, debt markets rallied (periphery).  Ireland is going to be one less counterfactual headwind for the EUR against the USD in about a day or two at the rate of the run on its debt Thursday…can’t service its debt with the currency it has, not at current yields. 

How about currency intervention involving the US Treasury and Fed?  This is plan B – break glass in case of an emergency.  But the Fed knows any early USD buying by US authorities would be counterproductive.  And keep in mind the Fed and Treasury split about $80bln in euro and yen…that is nothing considering how big the FX market is today…and they have to sell foreign currency – sustaining currency intervention when selling your own currency is far easier (another form of QE if unsterilized).  So rule this out apart from the likes of BOJ/MOF using unilateral intervention for G7…doubt ECB/Eurogroup would approve unilateral dollar buying. And there is no policy change to warrant a more favorable USD (support) intervention.

The only hope ahead for the USD is that continued weakness leads Asia and EM generally to impose capital controls as they reach a point where adding to further to record reserves is not productive (as it is they are forced to sell their dollars out for euros and other G10 currencies and gold to diversify FX risk…adds to USD decline vs majors).  Why would capital controls slow the dollar decline?  It would be interpreted by markets as a step closer to a trade war and closing down of the global economy and financial system…lead to sanctions on goods trade…which is hugely negative for global expansion…commodities crash, equities sell off and risk trade takes a big hit.  This is the Armageddon outcome and one that is seriously at risk at G20 in Seoul

David Gilmore  


Just looked back at some of my Alerts and saw this one from August 19, before Jackson Hole.



US Data - Soft Patch More Like Quick Sand, Calling For Fed Action Rising


Jobless claims are trending higher at if I had to bet the main source of newly unemployed are government workers as state and local governments face gaping budget deficits and in many cases no legislative responses to these deficits (California comes to mind).  Everyone knows too that this trend is politically radioactive for the Democrats in Congress heading into the midterm elections in November.  And since policy acts with long lags, there is no time like the present for policy action.  Fiscal policy is not an option short of a serious mutiny of centrist Democrats in the House and some in the Senate facing election.   Indeed not even the White House is going to push for new fiscal stimulus short of another calamity (I would argue there is far too much complacency on this risk at every level). 


My point is the Fed is the only available option…much as BOJ in Japan…and the political pressure on the Fed to act now and act big is growing exponentially in Washington and elsewhere in the liberal wing of the Democratic Party – Krugman and Stiglitz come to mind.  Frankly the message this week from Kocherlakota in public and likely Bernanke in private (to the Washington Post’s Irwin) of no need to panic or move rashly is surely going to lead to a rerun of the Bush 41 confrontation with Greenspan in 1992 election year (more on the line…Bush lost to Clinton). 


And it is not as if the economy is humming along growing jobs and income.  This economy stinks outside of two of the four bailed out industries (autos and banks – insurance and mortgage securitization not real winners). 


I am not pretending to be a fly on the wall in the White House or the FOMC.  But circumstances suggest Bernanke is under huge political pressure to act and act now…that message will get even more backing when Yellen and Raskin are confirmed…and likely Diamond with a lag. 


Bernanke will act and there will be more QE ahead and it won’t be particularly gradual.  Another lousy payroll report in short order will break the way of the White House and Democrats.  The Fed has a long history of reacting rather than “proacting”.  So what should a panicked Fed do?  Buying more Treasuries is so 2009.  How about buying munis which would allow state and local gvts to get back to more easily funding deficits and keeping public sector workers on the payrolls? 


Yes the phrase (song line) “yes I am turning Japanese, I really think so” is over used and tired…but look at the BOJ and Japanese gvt “Yen summit” next week to get an idea of what lies ahead for the Fed and US gvt policy debate and direction.  I am betting on both the BOJ and the Fed cracking under the pressure of an ever rising currency, weakening economy and the approach of key elections and hitting the panic button…fall elections are just around the corner and by-any-means-necessary applies.


David Gilmore     




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