Notes From Underground

There was little news this weekend in the arena of financial enlightenment. There were several stories about the FED and its balancing on a tightrope of inflation/deflation. Thomas Hoenig, the dissenter from Kansas, was out making sure that the markets understood that he was not calling for tightening but rather was trying to keep the FED from painting itself into the same corner that it had under SIR ALAN. Hoenig wants the “extended period” language exorcised from the FOMC release so that the FED has more flexibility to move if and when robust growth emerges.

Oh well, that should give the markets some solace that Hoenig is just thinking ahead and not really an obstinate hawk paying little heed to the national economic data. In the weekend Financial Times, there is an opinion piece by Alan Beattie, a former chief economist with the Bank of England, that challenges the notion of what the markets have to take for granted: an all-knowing central bank. The mass media has given life to the idea of the oracle nature of the FED and others, but Beattie does a nice job of debunking the myth. In the last two sentences he sums it up quite well:

“Central bankers are no more omnipotent than they are omniscient. Investors, the public and the Congress may be forced painfully to find that out.”

Here is a former central banker willing to acknowledge the limitations of knowledge. We at NOTES have been trying to make the point for a long time, for flawed analysis dependent on the conjectures of mathematical models can yield very damaging results. The recent 180 degree turn by the FED in a short four-month period should give us all cause for concern.

There was a Bloomberg story from Japan, citing the views of Eisuke Sakakibara, previously known as MR.YEN. The dialogue between the BOJ and the MOF has been heating up as the politico domos in Japan would like to bring a halt to the recent YEN appreciation. The Bank of Japan is more reticent to intervene and openly states that the market will set the rate. Sakakibara added fuel to the fire by saying in an interview that he thinks the YEN will make all-time highs against the DOLLAR. (Previous highs made in 1995 were on the 79 handle of DOLLAR/YEN.) As we see it, the problem is not Dollar/Yen but Euro/Yen. We stress again that the major competitor for Japan is not the U.S. but Germany. For the record we are nowhere near the all-time lows of Euro/Yen that were made in 2000–the Euro/Yen cross was on the 89 handle in October 2000–but the world was a far different place as Germany was suffering under the high costs of unification and rising wage rates. Since the Germans having put their house in order, a low Euro/Yen rate is giving the Germans a great competitive advantage.

Monday was the release of Japanese GDP and the number was much weaker than expected. Exports weren’t bad but that was coming off a much stronger Asian growth story in the second quarter, from which Japan was able to profit, but the Capex part of the data was weak as Japanese corporates are very uncertain about future growth. German exports are firing up their economy and they are taking an increasingly bigger piece of a slowing global economy. They are coming right out of the Japanese growth story due to a depreciating Euro/Yen. Mr.YEN had better start looking at Germany and not the DOLLAR, for that myopia is going to get the Japanese establishment in trouble. The DOLLAR relationship for Japan is an old story and because global commodities are priced in DOLLARS, a strengthening YEN has some advantages–not so with EURO/YEN.

Tags: Alan Greenspan, BOJ, Dollar, Dollar/Yen, Euro/Yen, Fed, FOMC, MOF, Thomas Hoenig, Yen

This entry was posted on August 16, 2010 at 10:05 am and is filed under Federal Reserve, Japan. 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.