Today is the inauguration of Obama and eyes will be glued to the TV most of the day, We didn't get a stock market rally on the Obama Effect and already commentators are warning that expectations are excessive - the guy can't pull a rabbit out of the hat.
The WSJ writes of the recession forecast "The bottom could be postponed if Mr. Obama's stimulus plans are hamstrung or prove ineffective. And improvement won't be lasting until bank balance sheets are repaired, clearing the way for more-normal financial markets."
We think this is exactly right.
All the tax cuts and public works projects cannot restore confidence and repair the economy until the banks are fixed. So far the consensus of opinion is that the Treasury has botched TARP, announcing it would buy toxic assets before finding out what they would cost and needing to withdraw the plan. Still, the US is activist and the US is a very rich country, and so the US dollar is getting the benefit of the doubt so far. We have been calling it the phenomenon of "it’s worse elsewhere." Events of yesterday and today are making that point.
Many commentators are trying to give the appearance of wisdom by saying that the US will have to get inflation and the US will have to face a refusal to buy its massive new paper issuance, and disapproval of giant budget deficits and a wall of debt must be US dollar negative. We say these things may turn out to be true but are not a useful basis on which to place Foreign Exchange market trades today.
It is an orientation or perspective, and not necessarily the right one. What if the US gets inflation and giant deficits but other countries get more inflation and bigger deficits?
Realistically, the folks who will make the judgment are central bank reserve managers, sovereign wealth fund managers and private fund managers like the South Korean pension manager who thinks it's time to sell US dollars. We'd bet $10 that somebody from the South Korean government has that guy out behind the shed right now. The US is the military ally and defender of the country against the Chinese and Russians, and has been since the early 1950's.
It’s not nice to say your defender's paper is junk. We expect a retraction and apology any day now. We saw it when a Japanese finance minister made a threat to withdraw from US dollar reserves back around 1997 or 1998 after a G7 meeting in the US. The poor guy had to break his trip home (in Guam) and issue the apology and retraction.
Conditions are very different with China, the biggest or second biggest buyer of US paper. Foreign Exchange Analysts are already saying that Beijing will be Obama's first stop on the usual foreign trip after the inauguration. In fact, the biggest things Obama can do in the first few weeks are
- find a way to fix the banking sector without becoming the first “socialist” president
- fix the housing sector and end foreclosures and
- talk the holders of US Treasuries to keep holding and to buy more.
This last category includes US citizens as well as the Asians. Health, energy and reversing the damage of last-minute Bush directives are less important. Oddly, Gitmo is not leass important because it’s a symbol of the US as a nation of laws, not of men.
We keep saying that every time "it's worse elsewhere," the US dollar exchange rates benefits.
This will continue to be true until bottom gets hit, and even then, the dollar can benefit on "first-in, first out." We look forward to seeing the euro exchange rate at 1.2000 before the end of March.
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