Amazing Grace! How sweet the sound,
That saved a wretch like me.
I once was lost but now am found,
Was blind, but now I see.
The markets are reacting to a Wall Street Journal article by the new FED fair-haired minion, Jon Hilsenrath, and the great dissonance that took place at the last FOMC meeting. Our readers know that we have been very critical of the FED and its reliance on models that, on a good day, are so badly flawed. The pursuit of economic policies based on poor analysis has been a major problem and the markets are waking up to the fact that the FED is neither omniscent nor omnipotent. Today, the markets are responding to the fear that the FED is” lost in the ozone ” so risk is being taken off and the algorithm’s of the risk-off trade are in full motion.
We at NOTES must ask: If the FED and its models are so badly broken why do investors want to run to DOLLARS for safety? If the major global policy force is in disarray, why do I wish to own its financial instruments? There is going to be a great deal of discussion among the premier academics in Jackson Hole this Thursday and Friday. But we stress that the FED is losing its credibility and there is concern about the way forward.
The FED will be looking to repair its fall from grace but it doesn’t know the way forward out of the policy maze in which it finds itself. The best thing is that the GREENSPAN PUT IS DEAD. But the FED is still lost and needs to be found. No wonder the Koreans and the Chinese are diversifying away from U.S. debt. U.S. residents are pouring into BONDS as the need for the return of their capital, just like the Japanese have done during the last 15 years. But on a global basis, the U.S. is far more important than Japan. Is this the discusiion that will break the back of the risk-off PARADIGM?
Tags: Bernanke, bonds, China, Dollar, Fed, FOMC, Greenspan Put, Japan, Korea, Wall Street Journal
August 24, 2010 at 9:55 am |
“If the FED and its models are so badly broken why do investors want to run to DOLLARS for safety?”
Wonderful question, and looking at precious metals this morning, looks like the truer safety of gold & silver is being recognized.
August 24, 2010 at 1:38 pm |
To paraphrase Churchill, the dollar’s outlook is the worst of the developed currencies out there…except for all the others. For now, if there’s dollar weakness, it’s at least in part that the United States wants a weak dollar to boost exports (since domestic consumption is going to stay weak for a while). Longer term, US demographic growth, the pull from higher education, a strong penchant for innovation, a continuing military lead (which will increasingly matter for commodities), underlying political stability and sheer size will keep the dollar going as the world’s preeminent reserve currency.
Right now bonds are priced for pessimism. Any signs that the outlook for the global economy is slightly less gloomy, and bonds will fall and yields rise.
August 24, 2010 at 1:45 pm |
I forgot to say that the first paragraph (above) is Eurasia Group´s view, the leading political risk consulting in the US. So, i´m curious about Yra´s reaction.
August 24, 2010 at 2:07 pm |
Arthur –thank you for clarifying .I felt that the first paragraph was too sanguine for you—they may be right but as a trader I need a time line.I need to know in a real sense–otherwise it is just platitudes and means nothing
August 24, 2010 at 2:25 pm |
Thanks. Completely agree! We love PRAXIS… In the long run we are all dead, Keynes.