Dear Friends,
Let us assume I was part of the present Fed team as head currency trader. My bosses, Chairman Bernanke and the Secretary of the US Treasury, wanted everyone in currency trading to take their eyes off interest rates and focus fully on comparative economic performance.
The Fed is injecting enormous amounts of monetary stimulation while Paulson, as a functionary of the Administration, may be considered the source of fiscal stimulation.
The strategy is to goose the economy in a vain and based off hope plan to save what is left of the housing market.
Today the following occurred:
Eurozone interest rates unchanged
The European Central Bank (ECB) has kept interest rates unchanged at 4%.
High oil prices and an increase in the cost of food have buoyed inflation in the eurozone at a time when economic growth is seen to be slowing.
The ECB has said inflation remains a problem. In January, inflation in the eurozone stood at a record 3.2%.
However, the central bank is expected to lower interest rates in the 15-nation eurozone later this year as growth slows.
More…
As head currency trader, it is my job market-wise to convince all involved in currency trading that interest rates, which the new school had depended on for so long to determine the value of currency, is no longer the determinant. Instead, competitive economic conditions are.
That is a no-brainer.
When the euro improved after not following the US Fed in slicing interest rates, I would wait and not bother with the early euro buying. When that buying slowed, I would pound it, but not too hard, only wishing to change its intra-day action from positive to negative.
The day would report the dollar having gained even though Euroland demonstrated a more conservative approach to central bank rate adjustments.
That is how it is done and was done today.
I should mention the Fed is taking a huge gamble that the Euro zone will fall faster than the US.
For years, the main US export has been derivatives. OTC derivatives understood by only a few is the problem. To export OTC derivatives, you have to have one side of it. That means the US is the country that will suffer the most, and may almost single-handedly bring on a Weimar type experience.
Focusing on relative economic performance will turn around and bite the dollar hard.
The wish to change the focus of what makes currency values happen has to mean the Fed is prepared to take the discount rate to zero and wants it off the table as a currency valuation point.
Jim Sinclair’s Commentary
If you remove the words “war reparations” and “the Treaty of Versailles,” replacing those words with “Over the Counter Derivatives” you can see we are using the same tools in the same way and will get to the same place - hyper-inflation and high unemployment. There is no question we are going there in form. I pray not in magnitude.
Glitter and Doom
From Wikipedia
World War I had left Germany with many economic, social, and political problems. In addition to enduring high inflation and a large national debt, Germans were deeply embittered by the harsh terms of the Versailles Treaty, signed in June 1919, which formally ended the war. Among other things, the treaty called for German disarmament and huge reparation payments to the Allies. Unable to meet the payments, Germany's currency collapsed and the German people suffered large financial losses. In January 1923 French and Belgian forces occupied Germany's main industrial region, the Ruhr, claiming that Germany had defaulted on reparation deliveries.
Glitter and Doom is the name of a Special Exhibit formerly shown at the Metropolitan Museum of Art featuring portrait art of Germany from 1919-1933, between the World Wars when the Weimar Republic was in political power. This Special Exhibit was shown from November 16, 2006 to February 19, 2007.
Life in the Weimar Republic was marked by massive hyperinflation, crippling poverty, and political upheaval. The massive number of orphans and widows without a means of feeding themselves resulted in prostitution on a scale not seen before in Germany. Additionally, the repeal and relaxation of laws forbidding prostitution, homosexuality, and other 'moral vices' led to an explosion of an underground culture, with people enjoying pursuits not available in other European Cities.
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Jim Sinclair’s Commentary
These fellows have OTC derivatives coming out of their ears. I know for a fact they had no idea where they stood at six months ago and may well not even have a good grasp on it now. The idea that either Fanny or Freddie can rescue or positively contribute to anything is stupid. All they can do is make the problem worse as they accumulate more bad paper.
