Wow, what a tough week!
We've been all over the place as we ride this roller-coaster headlong into Tuesday's Fed meeting.
I stick by my quarter-point cut theory (see yesterday's comments) as it would be politically tough for Bernanke not to throw us a bone BUT, with Greenspan doing a "mia culpa" about his previous easy money policy and backing Bernanke now ("We were dealing in an environment back then where inflation was easing. We could have acted without the fear of stoking inflationary pressures. You can't do that anymore….I'm not certain I would have done anything different."), it may be possible for our Fed Chair to take a stand here and JUST SAY NO!
The LAST thing this country needs with food and energy prices spiraling out of control is a rate cut so people can remortgage their homes to buy more food and energy. When prices outpace the public's ability to spend, there is a breaking point (demand destruction) at which the public stops spending, followed by a recessionary cycle in which less goods and services are purchased until the prices come down (deflation) to meet demand or (heaven forbid) wages go up to enable consumers to pay the steady prices. Following a policy of constantly funneling borrowed money to the consumer so they can keep paying higher prices CAN ONLY LEAD TO DISASTER.
Speaking of disasters, retail sales were up .3% but, ex-autos, down .4% – that's pretty damn bad! Import prices were surprisingly down .3% for Aug, and export prices (agriculture) were up .2%. Our Current account deficit came in at $190Bn as our government leads by example of some horrifically irresponsible spending habits...
Although we have many Asian subscribers, the Asian markets seemed to take yesterday's US market action as some sort of reason to rally. It looks like Aso may lose out to Fukuda in the race to lead Japan as various factions line up behind him. Fukuda is a fiscal conservative who favors tight money policies and a strong central bank – a dangerous recipe for the carry traders. Personally, I'm happy with any Asian leader whose name alone scares Western broadcasters. All kidding aside, this is a top-notch guy who is just what Japan needs. Unfortunately, what Japan needs is to stop mortgaging their future to prop up our dopey economy so look out below if the BOJ starts calling in those markers!
As I predicted earlier in the week China already jumped in to raise their interest rates by 0.27% as you don't have to hit their central bankers over the head with the inflation brick ten times before they take action. This is China's 5th hike of THIS year and analysts say it may not be the last. Buried in those import prices today, import prices from China specifically were up 0.3% – that is very bad for the Wal-Mart crowd! This move came AFTER the markets closed for the week so the FXI puts are a must today, I'm looking at the Oct $146 puts at $5.10 (we already have calls that we sold short, which will do quite well).
Over in Europe, the BOE had to bail out mortgage lender Northern Rock by providing emergency funding as that lender gets caught up in the non-existant spillover. I find it VERY funny that our own Fed continues to maintain that there is no spillover when the ripples we cause are so intense they can wreck financial institutions across the Atlantic!
"Early Friday, Northern Rock customers queued outside at least one branch to withdraw their savings after the mortgage lender was forced to tap the Bank of England for emergency funds. Some savers had been concerned weeks ago about the possible fallout from the subprime lending crisis on the U.K. lender. In Kingston, England, a line began to form more than an hour before the Castle Street branch opened as concerns about the institution's liquidity unnerved savers. A staff meeting appeared to be taking place before doors were unlocked. Around 9:00 local time, the line outside contained about 30 people, but swelled to more than 70 within half an hour. Almost all were over 50 years old and retired. All planned to withdraw their cash."
Holy cow – Europe's first run on a bank in almost 100 years! Mission Accomplished!
UK housing prices fell for the first time in 22 months as higher rates over there have led borrowers to exercise more caution. U.K. mortgage-lending rates are now expected to rise as the cost of borrowing has increased because of reduced global liquidity that followed the U.S. subprime lending crisis. Market turmoil also argues against another increase in the Bank of England's base rate, now at 5.75%.
Back home, I have little more to say about our markets than what I said yesterday (or all week for that matter). It would be nice not to give up all of yesterday's gains and I think we can hold on as hope springs eternal among the bulls. We here from our brokers next week as well but they can make their earnings say whatever they want (for a quarter or two) so I'm more concerned about the real economic picture than I am about Goldman's earnings.
Speaking of GS, the official losses on their Global Alpha fund for August was 22.7%, oops!
Well, we'll try to do a little better than that this week, I was really concerned I would have a very rough time holding onto my convictions going into the weekend but I'm feeling a little better about them now!
Be careful out there.
