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Thursday September 13, 2007 - 12:54:35 GMT
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“Bailout” starring Ben Bernanke, playing at a theatre near you?

Key News

·         ECONOMISTS ARE BOOSTING the odds of a recession over the next 12 months but disagree over the likelihood of a contraction.  – WSJ

·         Shinzo Abe resigned as Japan's prime minister after less than a year in office. His successor faces a split Parliament, aging population and soaring national debt. -- WSJ

·         House Prices in U.K. Fall for First Time Since 2005 as Interest Rates Rise -- Bloomberg


Key Reports Due (WSJ):


8:30a.m. Initial Jobless Claims. Expected: +4K. Previous: -19K.

10:00a.m. DJ-BTMU Business Barometer. Previous: +0.1%.

2:00p.m. Federal Budget Statement. Expected: -75B. Previous: -$36.32B.




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FX Trading – “Bailout” starring Ben Bernanke, playing at a theatre near you?



Ok, so the credit market hasn’t exactly recovered yet; not even close. I personally believe there’s a lot of dirty laundry still needing to be scrubbed before this situation gets looking any better.  In some recent comments, U.S. Treasury Secretary Hank Paulson seems to mirror that view.  According to a piece from The Financial Times earlier this week:


The crisis of confidence in credit markets is likely to last longer than previous financial shocks of the past two decades, Hank Paulson, Treasury secretary, warned on Tuesday.


He said the uncertainty in credit markets would last longer than the turmoil that followed the Asian crisis and the Russian default of the 1990s or the Latin American debt crisis of the 1980s.


Mr. Paulson said the likely duration of the turmoil reflected the difficulties of financial services companies in valuing complex assets tainted by mortgage-backed securities.


I couldn’t agree more.


Now where does that leave us? Can we expect sub prime fallout to infect the broader U.S. economy? After last Friday’s U.S. Jobs report it would sure seem that way. (In case you didn’t hear, economists were blindsided by a loss of 4,000 U.S. jobs after forecasting an addition of 100,000 jobs for the month of August.)


So assuming (like the majority of market watchers are doing) this credit crunch will only exacerbate the weakness that’s dancing around the U.S. economy, a Federal Reserve Fed Funds rate cut is right around the corner destined to save the day!


“Yeah, uhh, well, I’m just not sure about that right now.” as Bill Lumbergh so confidently states in the movie Office Space.


Big Ben the Bailout Man


Next week, the spotlight will shine brightly on the Federal Reserve’s main man Ben Bernanke. He’s got the joyous task of delivering their monetary policy decision on September 18th – a much anticipated decision.


Predictions from around the marketplace would have you believe a cut in the benchmark Fed Funds rate is a done deal; the only question is between 25 and 50 basis points.  This is obvious from recent market action -- the price of gold is soaring on the idea a rate cut would further undermine the U.S. dollar; the euro, Australian dollar and Canadian dollar have all rocketed higher on this same idea.


Have a look at the euro’s recent move …



But what if the Fed surprises the markets just as much as jobs did last Friday? After all, we’re talking about Bernanke’s Fed, and not Greenspan’s Fed.


Bernanke, the “academic” that he is, shows more discipline in following economic models and simulations.  Greenspan acted a little more from his gut.


Greenspan rushed in to slice down the Fed funds rate many times during his tenure, driven by his market instinct.  Were his actions always warranted?  Tough to say. I guess we’ll have to read the new book to find out.  Mr. G’s whirlwind tour starts Sunday night with a stop at CBS’ 60 Minutes.  Coincidental the book tour is during the same week as the most important Fed rate decision in a long time? 


Bernanke has been firm with monetary policy, almost as if he’s trying to make a statement that this is a new era of Fed decision making – no rolling over just because markets would prefer it. 


As much as Mr. B wants to show he believes in the “moral hazard” thing, it could be the case that he’s already been backed into a corner by analysts and economists from across the globe, his only escape being to submit to rate cut demands and bailout the mess makers.  And the gargantuan spread between short-term treasury bills and Fed Funds might also be a reason. 


The expectation of a cut seems to be one of the consistent reasons for the dollar’s recent pounding—which is part and parcel with view that recession looms.  In the currency game, it’s not often clear what the real drives are.  We often get so focused on the short-tem, much of it seems random and rumor driven.  But the idea of a falling yield differential and slowing relative growth in the US are both real and powerful negatives facing the greenback—no doubt. 


But that said, what I find interesting is that the dollar has followed the path of the 10-year T-note futures down on a weekly basis i.e. dollar falling as yields increase; you can see this in the chart comparing the US$ Index (blue line) to 10-year Treasury Note futures (black line):





Next week we’ll find out what all of Bernanke’s economic models and simulations are telling him.  We’ll see what he’s made of and we’ll learn just how much bad news is already priced into the lowly buck. 


John Ross Crooks III, Black Swan Capital


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