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Currency Currents

Thu, Jan 8 2009, 14:02 GMT

Black Swan Capital  |  View company's profile

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Key News
• South African Manufacturing Drops Most in Nine Years (Bloomberg)
• Obama Warns of Irreversible Economic Decline Without Action (Bloomberg)
• Buiter Says BOE Must Stoke Lending, Rate Cut Not Enough (Bloomberg)

Quotable
“Roosevelt did not come into office with a detailed program based on a firm ideological foundation. Rather, he saw himself as a pragmatist ready to try anything, an approach that engendered stultifying uncertainty. First, he mandated anticompetitive cartels; then he brought antitrust prosecutions against firms for monopolistic activity. Businesses were afraid to make long-term investment plans under such circumstances. Economic historian Robert Higgs writes in Depression, War, and Cold War, “Taken together, the many menacing New Deal measures, especially those from 1935 onward, gave business people and investors good reason to fear that the market economy might not survive in anything like its traditional form and that even more drastic developments, perhaps even some kind of collectivist dictatorship, could not be ruled out entirely.”

The New Deal did not, therefore, end the Depression. Yet as Higgs shows, neither did World War II. If by “depression” we mean falling living standards as a result of economic inactivity, we can hardly count the war years, with their rationing and shortages of consumer goods, as years of prosperity. The draft is a bogus way to reduce unemployment. The Depression ended after the war, when labor and industry could turn to satisfying consumers, not government.

What can we learn from all this? That money is too important to be left to the state. One way or another, government mismanagement of the monetary system wrecked the U.S. economy. It’s happening again now. The only permanent way to avoid a repetition is to place the system where it belongs: in the free market.

Second, efforts to prevent liquidation of malinvestment caused by inflation bankrupt companies and only prolong economic agony. Bailouts are counterproductive. Assets must be revalued and rearranged in the light of reality.

Third, government stimulus spending, borrowing, taxation, and public works commandeer scarce private resources and prevent entrepreneurs from shifting them to investments aligned with consumer, not political, preferences. As Price Fishback of the University of Arizona points out, even FDR didn’t try to stimulate the economy with extraordinary budget deficits, something for which Keynes criticized him.

Fourth, individual liberty is the first casualty when bureaucracy expands to manage the economy.

President-elect Obama would do well to take note, but we hardly have grounds for optimism. Obama has declared his intention to spend, New Deal-style, hundreds of billions of dollars—perhaps a trillion—to rebuild infrastructure, modernize schools, retrofit public buildings for energy efficiency, and expand the broadband network. No matter how meritorious these projects, they do not constitute a genuine recovery program. Government cannot escape the fact that it cannot create wealth. It can only transfer wealth from the private sector or create the illusion of wealth through inflation. Jobs created under inherently politicized programs will displace jobs the private sector would create if the burden of government were lifted and investor confidence restored.”

-- Sheldon Richman, Editor of the Freeman (writing in The American Conservative)

FX Trading – Keeping an Eye on GBP after the BOE

Is it over yet? Has the Bank of England reached a bottom with their rate cuts?

After today’s meeting BOE interest rates sit at 1.5% -- a 50 basis point haircut. Bloomberg.com tells us this is the lowest BOE rates have gone since the bank’s introduction. Whoa.

So far, the central bank and government in the United Kingdom have been throwing a lot of hope (read as: time and money) at the wall. But nothing seems to be sticking. The obvious indication is the availability, or flow, of credit among consumers. The situation remains really tight; lending and borrowing is minimal.

Already there’s talk of the BOE needing to adopt quantitative easing. That implies rates will first “flatline” ... approaching 0%.

So you would think this is a big negative from a yield-differential perspective. No longer is the British pound a “high-yielding” currency as it was so often called on its meteoric rise beyond the $2 threshold.

The big question now is whether, and when, central bank and government officials might finally be able to stop the economic pain and restore some faith in the UK consumer.

I don’t particularly think that will come anytime soon. Consumers across the globe are changing or have changed their spending habits. There is more pain still to go around and it seems like a recovery in consumption is well beyond the horizon.

What about the British pound? Well today, in the first hour following the 50-basis point rate cut, the kneejerk reaction was to buy the heck out of it. Just since the announcement the British pound has run-off more than 200 PIPs – not exactly what you’d expect after the type of news we got this morning.

Ok, so the rate cut was probably already priced in. But still, the long-term prospects for the pound remain sour. So what’s going on this morning ...

Daily view:

The last couple days have been strong for the pound, but it did make a new low just before the first of the year. I would expect GBPUSD’s climb falls short before the $1.57 mark. After that another new low is likely. Might this morning mark the turning point …

Hourly view:

On this morning’s surge the pound has made a key test of yesterday’s high. This is adverse price action (opposite what would be expected based on the news). And this move will prove critical in that the fundamental picture is decidedly negative. There’s a chance the pound barreled through buy-stops, shaking out those shorts expecting a big rate cut.

We saw some serious reversal moves yesterday. The pound’s got upside momentum right now, but keep an eye on how the pound behaves after today’s jump.

Regards,

John Ross Crooks, III
Black Swan Capital LLC

• Black Swan Currency Currents 8 January 2009

Published on  Thu, Jan 8 2009, 15:55 GMT

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