Notes From Underground

Testifying before the Financial Crisis Inquiry Commission, former Fed Chairman Alan Greenspan claimed that he was not at fault for the housing/credit crisis because it was not possible to forecast a bubble. And besides, Congress would have prevented the FED from acting to curtail the housing expansion. This testimony is so ludicrous. When Greenspan would testify before Congress as FED chairman, the running dogs of the Congressional finance committees would genuflect and place sacrifices before the smoky incense-enshrouded chairman. This is the same FED chairman who relished the deified status with which the media crowned him. Now he claims that he was actually beholden to Congress.

Besides that preposterous notion, Sir Alan–not Waters–claims that we should give him a break because he was right 70% of time. So now Greenspan is portraying himself to be just another options trader that picks up nickels and dimes and then gets run over when volatility explodes. As traders know, being right 70% of the time and blowing up when you are wrong 30% is no virtue. Alan, please leave the stage for the act is getting old. You created a low probability, high-impact event by your mismanagement. The oracle was too impressed by his own being that he failed to notice. The only role of Maestro Greenspan could play is on Seinfeld.

Tim Geithner is on his way to China tonight with the hope of getting some movement from the Chinese to revalue the RMB. Last June when the Treasury Secretary was in Shanghai, he was openly rediculed for his statement on the dollar’s value in a town hall setting with college students. Let’s hope that this time he is better prepared and has done much of the groundwork to claim some sort of victory. New York Senator Chuck Schumer has been making a great deal of noise of late, so some type of Chinese reval will take place soon. Then Schumer and company can claim a great victory for the November elections.

We have talked for a long time about the role of Sovereign Wealth Funds and the impact they will have when the global economy begins to turn up.The Chinese Investment Corp. (CIC) et al. have been desirious of making strategic acquisitions in the U.S. but have been rebuffed under the guise of CIFIUS. Interestingly today, Levono, the Chinese computer company, announced it was thinking about acquiring PALM. Previously, Huawei, a Chinese private technology company had tried to purchase a large piece of PALM, but was blocked for strategic military concerns. We will watch to see if a change is taking place in the role of Chinese sovereign wealth funds as quid pro quo for reval of the Reminbi. Also, if the Chinese were to reval their currency, we would look to buy commodities since the Chinese would probably move to stockpile all sorts of raw materials with a stronger currency. They talked about it on CNBC’s Fast Money and we agree. Get your pencils and chart books out and do your technicals, for the grains, metals and energies would enter a new realm, but that will need a reval of double digits as some of this is already priced into the market.

Thomas Hoenig, Kansas City FED president and noted inflation hawk, spoke today and was stoking the fires for a FED move to a 1% Fed Funds rate soon. As our readers know, we are aligned with that thinking for if this economy and equity market cannot handle a move to that level, then the fragility of the underlying economy is greater than most analysts have forecasted. The 2-year note futures continued rallying after Hoenig’s speech so the market did not give his opinion much weight, even though the talking heads were saying that was the reason for the break in the equities. More important than the equities is how Hoenig’s words are in direct conflict with Bernanke and Dudley. But what is truly important is that FOMC members have found their voices since the Greenspan dictatorship has been laid to rest. We cannot stress enough that the impact of 1% FED FUNDS would be minimal if the economy has any real strength, and the greatest action may well be on the 2/10 yield curve. A FED rate rise may actually curtail the selloff in the long end as the bond vigilantes deemed the FED to be serious about the return to a normal rate structure, especially in an envirnoment where the DOLLAR is holding its own. There is a lot to think about in Hoenig’s words.

Tags: Dollar, Fed, Fed Funds, Renimbi

This entry was posted on April 7, 2010 at 10:42 pm and is filed under Federal Reserve. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.