Posts by "jamshed"

"Reliving the summer of 2008"

Today, the markets are far apart from 2008's Lehman crash, market meltdown and the days of financial armageddon dubbed in the newsmedia as the Great Recession. Today, Gold sits at 1016, Oil at 71.50, S&P at 1071, Shanghai at 2840, VIX at 23, the 10 year note at 3.46 and the Fed funds rate at 0.25%. For an under-grad student of financial history reading this data in a hundred years, the odd one out of the above would be the Fed funds rate. Given the huge amount of money fed into the system by the Central Banks and the stimulus packages rolled out by the Goverments of the largest economies all over the world, it is little surprise that some kind of market boom has taken shape in the last few months. However, even with all this free public money entering the system, there are clear signs that the economic revival is weak at best.

The key question is whether all this free public money is able enough to revive the private sector to a level where Governments can withdraw and the private sector can take over its role generating healthy levels of growth in the global economy again? The Goverments and the Central Banks have three optinos now. Keep low the interests rates (continue AS IS), or increase the stimulus (PUMP UP) or start to withdraw the stimulus and to the increase the interest rates (WIND DOWN). The current state of the global economy suggests a continuation of AS IS policies which may result in either a cause of a heat up or a stall which would then force the global orchestrators of public policy to choose between a PUMP UP or a WIND DOWN. While continuing with the AS IS, the central bankers should be feeling confident to be signalling the markets for a WIND DOWN, however, make no mistakes, words are words and unless the economy is really fully firing up on all cylinders, the Feds and their friends around the Globe should continue with a soft hand.

If the above concept is correct, the continuation in the path of No Change with an accomodating monetary and fiscal policy, then, suggests that the markets would continue to climb, the Dollar would continue to fall and Gold and Oil should move higher and higher still. Any pitfalls, like a correction or a geo political event could only be a short term road block, even furthering the resolve of Governments to be more accomodating.

Now the question is - how long will it take for the Global economy and specially the US economy to be fully fixed so that it does not need these fiscal and monetary stimulus? The problem is, the FEDs and Co are giving an old medicine to a new problem. Given that permanent job losses have occured in the US economy due to jobs and manufacturing moving to China and India, how can the US economy be sustainable in the long run? On the shoulders of its financial skills alone, the economy is not sustainable as the case of UK shows under the "New Labour" policies of Brown and Blair for the last decade resulting in a meltdown of the UK economy. The financial muscle is now chasing Emerging Markets and commodities with a falling dollar, and there is no way the flow of funds can be regulated, unlike goods and labor. In the abscence of new "innovation streams", it is imperative that US and EU become uncompetitive due to their over valued currencies. The US can probably get out of this bit easier than EU - since it has the power to print its own money with not much hessle. The way out of the Great Recession for the US is to either print a lot of money and revalue the Dollar so that it becomes more comptetive in a global market place or to really setup fences and start a global war of protectionism. For the EU, these lessons would be learnt a little late. All this goes to the benefit of the BRICs and the Commodity Producers. This revaluation of the Dollar, followed up by the revaluation of the Euro in the following decades, can "correct" the global macro imbalances. But then, we cannot rule out the creative power of "innovation streams" that have arosen out of the US time and again in the last hundred years. "New Tech" can boost America and the rest of world - new products, solutions & services that increase productivity and provide for global needs - in infrastructure, energy, food, health care, commuications. But is America ready for New Tech or has the initiative already been taken over by China, India, Brazil and Korea??

In the short term, lets say in the next one year, we are going to be reliving the Summer of 2008 - a spike in Oil and a fall in the Dollar that causes a recession. How do we avoid it this time? If the FED continues to put all this free money in the system, the markets climb, the dollar falls, oil and gold climb, result in -guess what? a recession. Can the FED contain the stall the drop of the dollar at the cost of the "green shoots" recovery? Not really. What the FED should not l

Hi Ashraf,

2001-2008 Dollar depreciated, Oil and commodities boomed and Fed's lax monetary policy led to the housing asset bubble in US and more bubbles in EM equities etc. Euro gained during this time. The Bubbles in US housing burst leading to a recession bringing down global demand via since global economy was not "deleveradged".
Because US was debasing the dollar and running large deficits, it caused inflation and oil spike resutling in a global ecession. Although Euro zone was affected, ECB did nothing much - eventually resuting in Eurozone recession too. (Should ECB had considered softening?....but ECB has only price stability mandate)

How is the situation different now? US is again debasing its currency leading to a loss in dollar index. Would it not again cause a commodity and oil spike? Would it not cause the Euro to be over valued? This should push Eurozone deeper into recession rather than a growth story?

I cannot understand how Eurozone can sit idle and allow US Fed to cause EURUSD to go, for example, above 1.50 and definately above 1.6. This should somehow lead to intervention by the Eurozone governments in some way.

China and US are already practicing weak currency policies. The only way other countries can compete is also to weaken their currencies - and eventually causing new bubbles to emerge.

The US is in no way ready to increase taxes and China is not ready to allow its currency to appreciate easily. Meanwhile scores of countries including the middle east are linked to the dollar.

So, in summary, I agree with your current projection for 1.57 for the Eurusd. At the same time, I think it is not sustainable. Intervention may creep in or else the Eurozone is in deep trouble.

How is 2009-10 fall of the Dollar different from 2002-2008?
your thoughts, as always, are much appreciated

br,
jamshed

VOTE:Above $1.45


Fed will expand program for purchases for Treasuries with an additional 600B$ resulting in a drop in long term bonds and drop of the dollar. Oil should spike towards 85.