5 replies to this topic

[phil_hubb]

First, raising is out of the question. As for lowering: Lowering rates sends the greenback substantially lower and possibly sends PM's and oil to the moon. It could also precipitate an eventual flight from USD denominated assets by foreigners who's dollar denominated holdings are losing value in their home currencies. This could also move central banks to abandon treasuries. Also, if rates are lowered the carry trade unwinds as the yen and dollar would decouple even further. Yields on the long bond would also spike if rates were lowered as investors sold in search of better inflation hedges, this would exacerbate the subprime and ARM reset problem and thus restrict the flow of new credit. Finally, Ben doesn't want to prevent a recession, he wants to fix one. That's what he's trained his whole life for. He won't lower rates until after a he sees proof positive that the economy is deflating. All the moving averages will touch their 1000dma's before this is over. jmo

[skyymaster]

First, raising is out of the question.

As for lowering:
Lowering rates sends the greenback substantially lower and possibly sends PM's and oil to the moon. It could also precipitate an eventual flight from USD denominated assets by foreigners who's dollar denominated holdings are losing value in their home currencies.
This could also move central banks to abandon treasuries.

Also, if rates are lowered the carry trade unwinds as the yen and dollar would decouple even further.
Yields on the long bond would also spike if rates were lowered as investors sold in search of better inflation hedges, this would exacerbate the subprime and ARM reset problem and thus restrict the flow of new credit.

Finally, Ben doesn't want to prevent a recession, he wants to fix one. That's what he's trained his whole life for.
He won't lower rates until after a he sees proof positive that the economy is deflating.

All the moving averages will touch their 1000dma's before this is over.
jmo

If he is a true acadamian then he should not lower. Also, this mornings main news

Jobless claims rose to 334,000 last week, higher than expected; economy grew 4.0 percent in 2Q.

If the economy is growing and if his main focus is to avoid recession then he based on the above statement he should not cut 50 basis points. It is possible he could 25 basis points due to political crap.

[ogm]

Falling dollar = better exports for US companies. 45% of S&P earnings and about 60% of tech earnings come from abroad already. Better exports = better employment stability = shrinking trade deficit = support for the dollar. Falling dollar = makes US assets more attractive to foreigners, especcialy stocks. They can aquire world class assets doing a lot of global business at cheaper prices, considering their stronger currencies. There won't be a massive flight from bond market, as it is serving an important function that has no replacement.... The giant liquidity pool. Thats the market that everyone is rushing to when there is financial turmoil. For only reason.. its the most liquid market in the world. Its not the gold that is attracting money in flights for safety.. its the Liquidity pool. Carry trade vs the dollar assets is big, but its not the only one. Yen/ Aussie dollar/NZ dollar/ GBP are much more profitable trades. Yes, the Yen/Dollar trade is pretty big, but its not the only game in town. Fed has to preserve financial stability and confidence in the financial markets. Its one of their primary charters. They will do whatever it takes to do it. If it will require lowering rates, they will lower rates.

Edited by ogm, 30 August 2007 - 07:54 AM.

[traderpaul]

Falling dollar=China not making any money on their loan to us. Falling dollar=Foreigner's gain in stocks will be wipe out by the falling dollar. Falling dollar=Oil producing countres getting less for their oil.

[phil_hubb]

Falling dollar = better exports for US companies. 45% of S&P earnings and about 60% of tech earnings come from abroad already. Better exports = better employment stability = shrinking trade deficit = support for the dollar.

Falling dollar = makes US assets more attractive to foreigners, especcialy stocks. They can aquire world class assets doing a lot of global business at cheaper prices, considering their stronger currencies.

There won't be a massive flight from bond market, as it is serving an important function that has no replacement.... The giant liquidity pool. Thats the market that everyone is rushing to when there is financial turmoil. For only reason.. its the most liquid market in the world. Its not the gold that is attracting money in flights for safety.. its the Liquidity pool.

Carry trade vs the dollar assets is big, but its not the only one. Yen/ Aussie dollar/NZ dollar/ GBP are much more profitable trades. Yes, the Yen/Dollar trade is pretty big, but its not the only game in town.

Fed has to preserve financial stability and confidence in the financial markets. Its one of their primary charters. They will do whatever it takes to do it. If it will require lowering rates, they will lower rates.

"Falling dollar = better exports for US companies. 45% of S&P earnings and about 60% of tech earnings come from abroad already."
>>That is a big plus, but only for the big cap exporters. Many of them have moved so many of their components offshore that a falling dollar may not be as helpful as in the past. I would expect manufacturing and basic materials to strongly outperform small caps in this scenario.

"Falling dollar = makes US assets more attractive to foreigners, especcialy stocks. They can aquire world class assets doing a lot of global business at cheaper prices, considering their stronger currencies."
>>Only after the dollar bases, imo. While it is declining, expect foreigners to shun these assets.
Historically this is how it works. The periods of severest dollar depreciation were coupled with falling stock markets.

"There won't be a massive flight from bond market, as it is serving an important function that has no replacement.... The giant liquidity pool."
>>I didn't state that there would be a massive flight from the bond market especially, but that there would be a massive flight out of the long bond. This will jack the mortgage market at a time when that is what the fed would arguably want the least to happen.

"Carry trade vs the dollar assets is big, but its not the only one. Yen/ Aussie dollar/NZ dollar/ GBP are much more profitable trades."
>>The bottom line is that, with BOJ overnight rates at only 50bp and the BOJ playing a very dovish hand, the yen has still recently rallied up off of a multi year ascending trendline.
Yen sellers are getting pushed out. Some now, more later.
Bottom line, the selling in yen is all washed out, while other currencies have nowhere to go but down the yen is going in the opposite direction. Thus, the carry trade is finished.

"Fed has to preserve financial stability and confidence in the financial markets. Its one of their primary charters. They will do whatever it takes to do it. If it will require lowering rates, they will lower rates."
>>Their primary task is to protect the currency and stimulate job growth. As for the stability of the financial markets, that's what the discount window is for. We're only about 5% from all time highs in equities as a write this and the economy is purportedly strong.

The Fed is not charged with the task of indefinitely maintaining debt fueled, asset bubbles. And that's what we've been running on for the last five years.

We've reached a point now where it takes $5 of debt to create $1 of growth.
This is the end of the line.

That bull was getting old anyway.
That said, one more run for the roses wouldn't surprise me.
But keep an eye on the broker dealers, they've been leading all along, both up and down.
jmo

[johngeorge]

The US is NOT repeat NOT going to allow the dollar to take a back seat to ANY foreign currency. The dollar will remain the currency of the realm for some time to come. There is a lot of arm twisting that gets done behind the scenes whether that is in Europe, Asia, or elsewhere. Yes, one day we do lose our empire, but, not in the near future. Meanwhile the dollar remains king.