With the autumn comes the brisk northern air that reminds us of the fragility of life and the strict laws of nature; lessons which most years occupy a few thousand microns of brain tissue as such trivial metaphysical notions pass under the radar of consciousness. Yet it seems that we humans subscribe to a separate reality where our man made organism known as the global economy can defy reliance on physical laws and balances among parties, contrary to the paradigm within which organisms share resources and life.
These days death is so 20th century, aging is "faux pas", and failure is completely unacceptable, thus we open up the hood and start pulling wires until we seemingly avoid these outcomes in the short run, leaving plenty of duct tape and WD-40 on the fender if anything should go wrong.
The U.S. Fed Funds is at 0%, the U.S. Fed absorbed Fannie (FNM) and Freddie (FRE) (in effect adding the majority of the nation's housing debt to the Fed's balance sheet), tangible sovereign debt delinquencies are beginning to arise in Europe and the Middle East, and financial firms across the globe are continuing to buckle under the weight of more delinquencies and defaults. Consumer credit reaches new historical lows each month (a good thing in the long run), choking consumers to spend little more than they could in the midst of the market crash of 2008-2009. The dollar has fallen against most foreign currencies, until its recent rebound on speculation of a Fed Funds raise, releasing cheap money to all of the guys on Bernanke's A list (a short list which excludes mall cap firms and fewer private enterprises).
We all know the story, we all see the mayhem of economic data when we glance in the rear view, we even all expected that the music would eventually stop and the economy would have to walk "freely" by itself. It's the classic leak stopping cartoon where a guy is using one hand to cover a leak in his boat but the pressure just causes another breach and eventually he's out of appendages, but in Bernanke's boat he continues to grow arms and continues to stop leaks. Bernanke is an extremely intelligent and creative regulator who continues to invent Monetary tools to make his puppet dance, but we need a "real boy" not a puppet. When Fed Funds at 0% failed, he gave the banks money to lend; when shareholders panicked he seized the GSEs and secured their mortgages; and when the carry trade left too much liquidity in the system he decided to borrow the 0% money he gave to the "too big to fail" financial firms at 0% interest for a CD level premium. It's a financial shell game no better than a Ponzi scheme and the longer it goes on the more money it's going to cost the taxpayers who still don't have jobs.
But it will go on, because that's what the boys upstairs have clearly decided will happen, so the excess liquidity in the system has been the most recent phenomena to be traded off of. The carry trade uses cheap U.S. Dollars and invests in risky assets such as stocks, bonds, foreign firms, and commodities; allowing for a booming U.S. Stock market among other things. Until the masses became privy to what was making the puppet dance and the carry trade discounted in, Bernanke could enjoy the time he'd bought, but despite the struggling economy it now seems that Obama and his European buddies have a new scapegoat for our troubles other than the Fed Chairman.
Relations between Obama's White House and Hu Jintao's Chinese Leaders have been tense at best, as the recent pectoral flexing and anticompetitive trade tactics are squaring Obama and his cronies up against the 1.3 billion strong communist nation. Now calls for China to re-float the Renminbi (Chinese Yuan), after it was re-pegged to the U.S. dollar in August 2008, are becoming widespread as the economy is poised to grow at rates near 10% and its cheap goods are undercutting domestic producers across the world.
But the Yuan equals the same today in dollars that it did when it was re-pegged in 2008 and it seems that in true faith Obama could save a few taxpayer dollars on the long distance in exchange for a direct line to the Federal Reserve. Bernanke is just as responsible as Hu for undercutting foreign competitors as the U.S. Dollar has depreciated relative to ALL global currencies besides the Yuan. Now we see the dollar rising as U.S. Treasury debt falls out of favor ahead of suspected Fed Funds hikes in 2010 and the Yuan will pop into higher territory right along with it. It would seem that world leaders should have called for a de-pegging from the dollar in December 2008 rather than the current level near rock bottom for the currency, but we digress.
We do see further dollar weakness in the long term as the initial Fed Funds Rate increases occur, should growth not follow the increase in lending costs, but this would be a long term situation. In this scenario there will be little upside potential for the U.S. Dollar and the carry trade investments in U.S. Assets will be far too risky, given the underlying weakness of American firms in such an environment. The potential for bond yields to rise and the dollar to fall a second time would be high in an environment where the U.S. Government and private sector are both deemed poor refuges for individuals' cash. More immediately however, commodities will pull back as the rise of the dollar continues and the ability of gains to be made by U.S. Investors amidst a rising dollar takes a great deal of money out of U.S. Equities and into foreign stocks instead. We see this point as a good entry for short Oil positions and short U.S. Equity positions.