When a Bad Budget is a Good Thing

Feb. 16, 2011 2:19 PM ETFXB, FXC, FXE, FXF, FXY, UDN
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Currencies, Commodities

Contributor Since 2009

Ralph Shell began his career as a grain trader for a large international grain trading firm. This involved negotiation of export contracts and moving grain and soy beans from the US to the export markets of the world. For a period, he also handled the companies hedging and trading activity in the pit of the Kansas City Board of Trade. After a short stint as a commodity analyst with Merrill Lynch in Chicago Shell began a career as analyst and trader on the floor of the Chicago Board of Trade. After trading on the floor for almost 20 years. the career continued as a broker trader away from the harsh Chicago climate. Commodity trading continued in the grains and other commodities, but the focus in recent years had been on the Forex markets.

Speaking like some government propagandist from Atlas Shrugged, David Kendall, expressing his opinion in The Hill, wrote "Why the president's budget is a success."  The proposed Obama budget which projects a record $1,645T deficit is a good thing, a "resounding success" since it promotes a vigorous debate, say Kendall.  The deficit, in excess of $10,000 per person, certainly does encourage debate.

President Obama contends that spending cuts will hurt the fragile economic recovery.  The only true recovery, however, has been the growth of government and its employees where the total pay package for government workers now far exceeds the private sector.  Most of the wealthiest counties in the entire country are the collar counties surrounding Washington, a tribute to our government's ability to get and keep other peoples money. 

There are many who think we now have government of the people by the government for the government.  One example of this might be tucked away in the budget bill.  There is an allocation for $359M to hire 1054 new IRS Agents needed to supervise the initial implementation of Obamacare, the health care revolution opposed by a majority of Americans.

A centralized government is good at growing itself but is it really an efficient and effective manager?  This week I unexpectedly received a $250 check for my part D Medicare Coverage Gap Rebate.  Unknown to me this is a rebate for those, who in the previous year, exceeded subsidized drug expenditures and went into the 'drug donut hole.'  How efficient though is the government's part D program?  Recently I picked up a monthly supply of a drug which cost me $7.00, but the insurance company charged the government $284.32.  This far exceeds the cost of the same generic drug that I have acquired from an overseas pharmacy for $81.14 plus shipping.

Would you believe this is the same dysfunctional group of people that recently, by the FCC Committee's 3 to 2 vote, decided they were going to regulate the internet!

Easy, remarkable easy it is, to get bearish on the future of the country and it's currency.  Remember, however, that there is opposition to the current budget, and the possibility of a budgetary civil war exists.  The toadies and handmaidens on TV and in the press will promote their administration, but there is a not so silent majority that objects to the budget and its implications.   It will be interesting to see how this plays out.

Another reason to be wary about the short USD is because this is an extremely popular trade with the spec crowd.  As we have pointed out, specs had a record of 319k contracts of short USD's in the latest COT report, so piling on a popular trade might be a little late.  And while the US might be an unhappy family, unlike the euro community it is one family.

This morning the US PPI increased by 0.8%, but less than the anticipated 0.9%, but the core rate was up 0.5%, more than the expected increase of 0.2%.  Tomorrow we get the US CPI numbers which are expected to show only modest increases.  Although there is commodity inflation, it is hard to make a case for sustained inflation, with a surplus of labor, amply unused production capacity, and the inventory of empty houses.

Yesterday was a big trading day for the pound.  In the futures markets the pound open interest was up 21,548 contracts, taking the total open interest in futures only to about 133k contracts.  Sometimes these big changes wash out in a day or so, but if they do not, this is a notable increase in longs and shorts.  We did have some bear pound currency news as BOE Gov. King implied that the risk of damage by a rate hike exceeds potential harm to the economy from inflation.  After taking out yesterday's low at 1.6001, the bulls were successful defending their positions.

We may be headed for a break out from here, but which way?

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