The US election leaves Mr. Bernanke’s job safe for a while, at least until the end of his term in Jan 2014. The prospect of a loosey-goosey Fed is favorable for equities, as we have seen, and seems to outweigh worries about the fiscal cliff. Some analysts say it’s beginning to be time to question the Fed’s chops if inflation were to start appearing, whether from imports or any other cause. All it would take is a strong FOMC statement that the Fed remains committed to managing inflation to 2% or below and has the tools to enforce the commitment. We are a little puzzled as to why analysts think Mr. Bernanke doesn’t know this.
That doesn’t mean QE is not a key risk to the economy and to the dollar—it is. But we were trading Fed funds in 1980 as the Volcker anti-inflation policies were being implemented and we are mightily impressed by the ability of the Fed to bully the banks. That leaves the question of whether Bernanke has the guts that Volcker had. Either way, a whiff of inflation will scare the pants off the markets. It’s the one thing that can make transform good US data making the world safe for risk into something else. But realistically, this is a long ways off. It’s not particularly useful to consider right now.
More useful is that the fate of the eurozone lies in the hands of 300 Greek parliamentarians, some of whom plan to abstain from voting on the new austerity plan. Somehow we think they were not elected to abstain. If the budget doesn’t pass, presumably the bailout doesn’t get disbursed and Greece defaults on the bond coming due Nov 16. Now that’s a cliff-hanger!
The EMU sanity check:
- The IMF predicts a 80% probability of eurozone recession in 2013. The European Commission cut its eurozone growth forecast to 0.1% in 2013 from 1% in May. German growth was cut in half to 0.8% from 1.7%.
- The WSJ estimates capital flight/deleveraging credit contraction by $2.8 trillion in assets by end-2013
- German thank-tank forecast EMU growth at -0.5% this year and +0.1% next year.
- S&P cut Spain's rating two notches to triple-B-minus, one step over junk, and Moody’s has the same rating (Baa3), also one notch over junk. Moody’s cut the ratings of half the Spanish regions. S&P cut the SocGen rating by one notch and issued a negative outlook for the other two big French banks on deteriorating conditions.
- The EU banking supervisor will be established by year-end but may not have the authority to recapitalize the Spanish banks for another 6-12 months.
- Greece needs the additional €30 billion in bailout money. The deadline is a bond redemption on Nov 16.
|SPOT||CURRENT POSITION||SIGNAL STRENGHT||OPEN DATE||OPEN RATE||POSITION GAIN/LOSS|
|USD/JPY||80.24||LONG USD||STRONG||10 /17/12||78.46||1.91%|
|EURO/GBP||0.8014||SHORT EURO||WEAK||11 /06/12||0.8001||0.16%|
|GBP/JPY||128.30||LONG GBP||WEAK||10 /18/12||128.04||0.20%|
|USD/CAD||0.9906||LONG USD||WEAK||10 /04/12||1.0229||0.45%|