Notes From Underground: Time to Unwind

The dollar was sold off today as the profit takers lightened their long positions ahead of the long holiday weekend. Economic releases in the U.S. provided a mixed picture as spending was fairly strong but new home sales were much weaker than expected. Long-term treasuries attempted to stage a rally from the previous onslaught of selling but the rally fizzled by the close.

However, the selling of BUNDS over in Europe compounded the U.S. debt picture, as hedge funds unwound some of the German/Greek spreads that were put on early in the week. The 10-year German/Greek was back at 239 basis points after having seen 276 previously. The Italian bond future was virtually unchanged while the BUND futures closed down 60 ticks as some calm was seemingly restored. Will this view prevail? We don’t believe so as the Greeks will come up short in their promises to cut the proposed budget by almost 4%. This is not possible with a socialist government in power unless taxes on the wealthy are raised to levels that will surely prevent any growth in the Greek economy.

The Irish government is also promising to install government cuts but the markets deem the Irish to have more credibility. Ireland’s alternative problem is that they have guaranteed the solvency of its banks. But if the assets continue to depreciate and the loans become non-performing, the Irish government will be on the hook for a great deal of money. Europe’s problems are growing, which makes the currency outlook in 2010 so difficult to predict. It is what keeps us on the Gold/Euro cross as a key indicator of investor sentiment. We must remember that currencies are always a relative phenomenon and predicting future value is predicated on so many variables. The failure of the U.S. dollar to stage a meaningful rally in the near term will be representative of how the financial world deems the policies of the Obama administration and the albatross around our necks called Congress. This theme we will examine as the calendar turns to 2010.

The IMF delt a blow to Ukraine today, announcing that there would be no $2 billion loan to see it through the year. It will be of interest how Kiev meets its payments to Gazprom to ensure the flow of gas to Eastern and Western Europe. Will the other Europeans provide the funding to keep the heat turned on in Paris,Vienna,

Also, the Bank of England announced that the MPC (Monetary Policy Committee) will keep the quantitative easing program in place as they have not been satisfied by the growth in money supply. All of that liquidity infusion and there is no velocity to the credit creation needed to spur growth. This supports our view that GOLD was rallying out of the fear of deflation. If the central banks were to fail in generating some inflation, what would they do policy-wise as they begin to panic? We continue to stress that highly indebted economies cannot tolerate a deflationary spiral–the systemic ramifications politically and econmically are too grave for the maintenance of the global financial system.

Wishing all of our readers peace and prosperity for the New Year and happy holidays to all.

Tags: , ,

Leave a Reply

%d bloggers like this: