Ralph Shell @ 12:57 PM, Friday November 12 2010
The G - 20 Meetings which received so much attention this past week, ended quietly as expected and resolved nothing. This morning Boston.com did observe that; "Obama's economic view is rejected on world stage, and that core elements of Obama’s strategy of stimulating growth before focusing on deficit reduction (were rejected).
Moreover, Obama seemed to be losing the broader debate over austerity. The president has insisted that at a moment of weak private demand, the best way to spur economic growth is to have the government prime the pump with cheap credit and government stimulus programs. He quickly found himself in an argument with Prime Minister David Cameron of Britain and Chancellor Angela Merkel of Germany.
“You do hear the argument made sometimes: If you have a deficit, put off the action to deal with it because taking money out of the economy will reduce your growth rate,’’ Cameron said at the meeting. “I simply don’t accept that.’’
The administrations $787B stimulus plan was successful in creating Government jobs, and increased incomes for those that were hired. Newsweek reports that 7 out of the 10 richest counties in America are in the Washington DC area. The richest state in terms of medium family income is Maryland, a large bedroom state for Federal employees, with $69,272 per household.
Main Street's concerns that borrowing and spending to save the jobs of friends and supporters of the administration is not good policy, and has resulted in a major shift of political power. The American voters, agreeing with British PM David Cameron, sent many of those who voted for these policies, home. The East Coast liberals and the California spendthrifts bemoan the pending arrival of austerity in the US. So far the British austerity plans, though not fully implemented, have helped the pound, as it has rallied about 2000 points. Could the same thing happen to the USD?
With the mysteries of Fed Chairman Bernanke's QEII revealed, the forex markets have been free to move forward and find a new worry. Namely the peripheral debt of of the weaker euro members. With sluggish economies, staggering debt and high interest rates, who will be the first to tap into the €750B bail out fund. And what next? Could there be a run on this fund? Probably not, but markets do like to fret about the unknown.
It looks like the Chinese equities markets are nullifying the QEII efforts to reflate the US equity markets. The Shanghai Composite Index took it's biggest hit of the year, trading down 5.2%. Rumors that the Chinese are going to make efforts to cool their economy are circulating. Higher interest rate, and restricting the purchase of real estate by foreign companies are two of the rumors. Do the Chinese, by the way, have and enforce rules about insider trading?
Commodities, another beneficiary from the perceived notion that QEII is going to inflate the world's prices, has taken a huge hit today. Prices go up as long as the hot money keeps flowing into these markets. Over the short term user commodity demand is very elastic. Quickly the high prices restrict user demand, and when the spec inflow slows or reverses, these markets can get ugly. Crude oil is only down 3.44% but soy beans are down 5.23% and #11 Sugar is down 11%. Gold, everybody's most favored alternative currency is down only 2.84% to 1363.50. Sharp Friday sell offs usually mean margin calls, and often a nasty continuation of the down on Monday. A old adage says, 'when they raid a whore house, they take all the girls, and the piano player too.'
We have no trades or charts today, but we do wonder if some of the commodity currencies will take a hit on Monday.
Have a great weekend.
Ralph
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.