Look....unless ur a prof. of econ and unless your heavy long the dollar...who cares at this point. Damage has been done. As a trader i welcome a serious FEAR FACTORS...this will increase volititly and will create good trading opportunities. If a Financial crises ever does occure........this will give us plenty of room to sell off......and hopefully some great shorting opportunities. IT IS WHAT IT IS....no one can change the course we are on. All you can do is play it. Its the hand your delt, the cards you play. Crises bring on good trading situations. IE: Asian financial crises was a great time to be a trader. Our market moved like crazy. The problem now...to many people have their head in the sand...wishing, praying and hope is all around us. FEAR....DOOMSDAY......CRISES is just what we need to kick start some volititly. I say BRING IT ON
As virtually everyone on ET must know by now, Greenspan has been boasting since his college days that he would have the moves to avert the next Kondratieff Winter if he were Fed Head when it came due. Well, he is, and his bag of tricks has been holding off the chilly weather for years now, but some would insist that sooner or later the snow must come - it's just the way the macro cycle works. Stagflation, which you describe above, may well be the guise in which Greenspan's K-Winter appears.
This week (9th December 2003), the FOMC will meet. While widely expected to still hold the rates at 1.00%, the Fed's stance towards the future will be widely awaited. With the RBA and BoE already start a monetary tightening cycle, it's the Fed's turn now whether to keep their previous statement 'to keep policy accommodative for a "considerable period of time"' or to drop it. Should the Fed keep their stance towards accomodative monetary policy, the USD will likely to get another stab in the back. USD's relentless retreat has been quite worrying. Especially that it keeps on falling despite sound news from the economic front. Should the Fed's words still can't lend a helping hand to the USD's fortunes, then perhaps nothing else can help USD to recover. The market, then, will continue to choose to purchase euro, pound, swiss franc, australian dollar, and gold. The market even growing more bold in pushing down the USD/JPY rate, defying the Bank of Japan's commitment to keep the pair at a not-too-dangerously-low-level. Regarding enquiry about the good and the bad of high interest rates, I think the CBs use an 'easy/accomodative' monetary policy (low rates) to stimulate economic growth. This was the CBs policy just before the RBA and BoE started to raise rates. During economic recession, it is widely recognized that low rates can re-charge the nation's growth by making the cost of borrowing cheaper. However, as the economy grows more and more positive, after periods of low rates, there is a tendency of economic growth 'overheat'. This, could lead to inflation. When this happens, the CBs usually ponder about hiking the rates. And this, is what is happening right now. With an explosive 3rd quarter growth, plus other bright economy data, the Fed will almost surely begin to consider hiking the rates. On the other side of the Atlantic, ECB may tend to hold their powder dry -- at least for a while. Euro's latest surge of strength could also be considered as an equivalent to interest rate hike. Giving another tightening in rates will risk the Eurozone's growth to choke. That, would be the last thing that the ECB wants. Japan, on the other hand, is indeed in a more difficult position. Rising rates will push more investment in Japanese assets, which, of course lead to yen strengthening. An already started economic growth picking-up has already lead the yen-strengthening process, which has sparked series of interventions by BoJ. They argue that strong yen will risk the growth prospect of Japan's economy. This situation leads to my conclusion that the BoJ will take a very long time before they even consider hiking the rates. Well, that's all I can say for now. Hope it's useful. Critics and comments are welcome. Good luck, good trade.
"Are you in Japan? $500,000 yields $5000? 1% interest? The 10 year has been bouncing between 4 and 4.5% for awhile now. Muni's, mortgage backed securities, etc.. provide a nice income stream to those with savings."--convertibility I couldn't disagree more. How can you say that 4% to 4.5% is a reasonable return for a 10 year period? I would never lock up money for that amount of time for such low interest.
4% return with inflation running at 1% yields a 3% real return. 10% return with inflation at 7% yields 3% real rate of return. No real difference. As for today's yields, they're low, but low relative to where they have been. Expectations do play a role too. What if the US were to experience what Japan has faced the past 10 or so years? 4% doesn't seem so bad. If for some reason we have the 80's all over again, then 4% is a joke.
I understand your point of view. Just thinking about what has happened to Japan the last decade makes me sick. Let's hope we don't have to experience that.
the us government has an incentive to let the us$ fall. if you owed money to most other countries and had a boatload of us$ floating around the world what would be the best thing that could happen to you? you would want your currency to fall 50% against other currencies. that way when your debt is repaid it will be with a us$ that is worth 1/2 of what it was when you took on the debt. its brilliant really. think about it. china sends us goods in exchange for paper money. china cant eat paper money so they have to spend it buying something from us eventually.(commodities?)if in the timespan that they took our paper money and when they spend it the value of that currency falls 50% they get screwed. they also get screwed by holding onto our bonds. they get 5% interest but lose 50% in the currency devaluation.
The administration is quite happy to have the dollar fall. It is one powerful tool they can wield in the trade wars with the europeans that the WTO can do nothing about. The ECB has two unappealing choices, cut rates or intervene. The euro/$ may be ready to retrace a bit on its own after its relentless rise. But the key ingredients are still present to cause further weakening, eg, rate differential, trade deficit, budget deficit, euro distrust of Bush administration and the belief that the administration is ok with a weakening dollar. The higher US growth rate is a presumed plus for the dollar, but it also contributes to the trade deficit and will only strengthen the dollar if it translates into investment flows. This thing has the potential to get very ugly and undermine the stock market. See October '87 for details.
If you think about it, the US has been the worlds "cash cow" for decades. Our spending thrust Japan economic-superpower status at the expense of our trade deficit. The prolem is that, once a correction begins, the RoW gets upset because changes in our economy have a huge effect on the RoW. Nations try to suppress their currencies unnaturally. This all just postpones the ineveitable. The more currencies are manipulated in this way the worse the inevitable "crash" of the USD will be. A cash cow can only be milked for so long before it goes dry.
The latest development in the currency market has put the USD at/approaching multi-year lows against a set of currencies. Against Euro, the USD scored another all-time-low at 1.2239, against British pound, it approached 1.7366, October 1998's peak of GBP/USD, recorded 1.7361 as the latest high. Against Swiss franc, it sank below 1.2734 (October 1998's low) at 1.2628. USD/JPY has been more timid due to BoJ's intervention wariness. Still, it dipped to 107.08, approaching the November 2000's low at 106.76. Aussie relentless rise has put it at .7413, a pip below Oct 1997's peak, the neighboring currency, New Zealand Dollar, rose towards .6507, matching the peak set at Oct 1997. Canadian dollar still swimming below 1.3000, waiting to drop to the November 1993's low at 1.2900. And there's still no end in sight. Should today's FOMC meeting yield no corrective pullback against these currencies, I guess nothing else can lift the USD. While the steel tarriffs have been put to rest by Bush Administration, there's another row about oil. Here's an excerpt from Bear Stearns NY daily commentary dated December 5th 2003: "Fortunately, the steel tariff row has been put to bed by the White House's decision to rescind the tariffs. Unfortunately, there are plenty of other issues that could replace steel as both hotbeds of trade friction and sources of instability for the dollar. Tax breaks for some large US exporters are still to be replaced by a system that will forestall retaliatory tariffs from the EU. This could easily test the patience of the EU next spring. This dispute, like steel, has been ongoing for some time and hence is well known to the market. However, there is one issue that could create international tension, and dollar weakness, that is perhaps only in its infancy right now. It concerns oil. US Energy Secretary Spencer Abraham reacted angrily to suggestions from OPEC that the weakness of the dollar could spur output cuts early next year. OPEC is clearly angry that revenues from oil production have been cut down by the weaker dollar; Abraham is angry that OPEC never gave the world a break when the dollar was strong. But the US has to be careful here. As it found in the steel tariff row, helping domestic suppliers might have its merits, but such help is of little benefit if the domestic buyers of the product are forced to pay higher prices as a result. Hence, if the US continues to put pressure on OPEC it could end up on the wrong side of much higher oil prices. A key factor here is the level of the dollar itself. The weakness of the dollar clearly eats into OPEC's revenues. As the US energy department rightly points out, this is just part of the swings and roundabouts that accompanies trade. OPEC enjoys benefits when the dollar is strong, and costs when it is weak. And, provided the benefits and costs even each other out over the longer term, OPEC should not moan when times are hard. While this view makes perfect sense, we have to bear in mind two issues. The first is that the dollar has fallen very far and, if we are right, has much further to fall. So, if OPEC feels hard done by now, it will feel a lot worse in the future. A second issue is that the euro is clearly developing an international currency role to eventually rival the dollar in a way that the likes of the yen and Deutschmark never did. There has already been a lot of talk, admittedly from the EU, that Russia could price its oil in euros. Russian authorities have been a bit more circumspect, but the possibility of Russian/European oil trade being denominated in euros rather than dollars, must surely be something that the Russian government and Russian producers will have to think about long and hard. Of course, it is one thing to suggest that Russia will start to price in euros (at least to Europe) and another to suggest that OPEC could move in the same direction. However, we have to bear in mind that Iraq priced its oil in euros before the war earlier this year and Iran has talked openly about using euros rather than dollars. What's more, there has been a lot of talk in the market that Middle Eastern dollar sales and euro purchases have been behind much of the euro's strength this year. If this is the case it could well demonstrate that some oil producers want to reduce their reliance on the dollar, and part of the reason for this could be to eventually make greater use of the euro in oil pricing. Certainly in Russia, there has been a very significant move away from the dollar in both reserves and domestic deposits. This clearly makes sense given that Russia supplies around a half of Europe's oil needs. It is not so obvious that Middle Eastern countries should make a similar switch. Nevertheless, there are some signs that it is happening. And if the dollar continues to plunge beyond even our USD1.30 target for the euro, these trends will surely accelerate. And hence we could get into a very negative downward spiral for the dollar as more dollar weakness creates more pressure to de-emphasize the dollar in domestic finance and perhaps oil pricing as well, which, in turn, causes even more dollar weakness. In the end, the US economy would be the loser from both significant dollar weakness and a reduced role for the dollar on an international scale. With this in mind, it might be a good idea if the department of energy were to resist criticizing OPEC policy." Regarding ECB, I don't think they would risk the Eurozone slow (slow compared to US) by hiking the rates too soon. Not to mention that the current EUR/USD already an equivalent to rate hike. As for cutting the rates... with growth already running (although its pace is still slow), cutting more base points on Eurozone rates would be unimaginable to me. Still, the more significant event of this week, as I have mentioned before on this thread, will be today's FOMC meeting. That's all for now. Good luck, good trade.