Wednesday March 15, 2006 - 11:37:48 GMT
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Black Swan Capital - www.blackswantrading.com
Careful about overshooting...
âInterest rates are the lipstick on the pig of paper money, according to the Bank for International Settlements. Actually, the BISâthe central bankersâ own Swiss bankâputs the matter slightly more clinically.â
The dollar was smoked on poor retail sales and a blowout US current account deficit. Have we swerved into âovershoot territoryâ on the Fed Funds? On Monday, Federal Reserve Bank of San Francisco President Janet Yellen said, âWe do need to be careful about overshooting.â It was summed up well, we think, in Grantâs Interest Rate Observer of March 10:
âThe ârisk managementâ and âpost-bubble cleanupâ policies of Alan Greenspan helped to precipitate the stock market bubble andâafter a spell of ultra-low interest ratesâthe housing bubble. And now the funds rate is apparently going up and upâand perhaps up again, on account of the economic strength supposedly revealed in the latest batch of economic data (never mind that monetary policy is acknowledged to work with a âlong and variable lagâ).â
Was the move in Eurodollars a need-jerk corrective reaction or the beginning of something more? Is the move in Eurodollars in any way related to the âfraying at the edgesâ in the emerging markets weâve seen? In other words, those markets most susceptible to tightening liquidity âat the marginâ?
âAs the total amount of debt outstanding accumulates, the portion that has to be utilized for debt service increases. It is only net new lending that stimulates, and total new lending has to keep rising in order to keep new lending stable,â writes Mr. George Soros.
âŚandâŚâThe major difficulty is that credit need not be involved in the physical production or consumption of goods and services; it may be used to purely financial purposes. In this case, its influence on economic activity becomes problematic.â
Today, traders take a look at Treasury International Capital data. This number has become a big deal of late. Maybe it tells us how willing others are to keep funding the primary consuming nation. Maybe it tells us whether that additional credit will be there to support much in the way of credit used for âpurely financial purposes.â
The show begins at 9:00 a.m. EST. Stay tuned!
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