Wednesday, March 23, 2011

What Are They Thinking?

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By Mike Conlon | March 23, 2011

It seems like there is a lot of “denial” going on around the globe these days, much to the detriment of those who just want to live their lives. Decisions made by those in power have been getting worse and are starting to negatively affect the very same people they are supposed to protect.

Some “questionable” decisions of late: Bernanke’s QE2 policy, Japan’s initial response to the nuclear damage, Obama’s decision to follow the French into bombing Libya, the BOE decision to maintain interest rates in the face of inflation, the EU non-decision on how to handle the debt crisis. All of these judgments have a serious impact on both economic and societal harmony and so far have done little to improve these situations.

So it makes me wonder who is benefiting? Right now, it is seemingly government itself and not the people they represent. This brings me today’s question of the government vote in Portugal, where they are weighing the decision whether or not to accept extreme austerity measures to avoid an EU bailout. Well in today’s economic climate everyone is seemingly out for themselves, so why should Portugal be any different?

It will be interesting to see what they do, but the market has already punished them by pushing bond yields higher, as if they have already chosen. The economic events of the last two years have proved that there is no longer any morality in finance, and once moral hazard is accepted as the norm, there is no reason to behave responsibly.

Thus there is some risk aversion in the marketplace this morning, with stocks and commodities slightly lower.

In the forex market:

Aussie (AUD): The Aussie is trading pretty flat to lower to start the morning as the relative risk in the market is just slight enough to apply pressure. With no news out of Australia this week, the Aussie’s rate differentials look very attractive.

Kiwi (NZD): GDP figures are due out of NZ later this evening which will likely show a hit to GDP in the short-run as a result of the earthquake, but there is optimism that the rebuilding efforts will add to GDP next year. (Click chart to enlarge)


Loonie (CAD): The Loonie is mixed after yesterday’s dismal retail sales figures. As the US goes, so goes Canada. With oil prices retreating slightly to just under $102, the Loonie is also somewhat lower.

Euro (EUR): Were it not for the Pound, the Euro would be lower across the board. Industrial new orders came in lower than expected and the vote by the Portuguese government over whether to accept aggressive austerity measures to avoid an EU bailout. (Click chart to enlarge)


Pound (GBP): The Pound is lower across the board as the there was no change in policy-maker stance to leave rates unchanged in the face of rising inflation. The UK doesn’t have the benefit that the US does by hiding true inflation by measuring things that no on cares about, so the BOE is likely to come under fire. “Merit in waiting” was the operative phrase used to justify their position.

Dollar (USD): The Dollar is seeing some mild strength this morning on risk aversion, though new home sales due out later this morning could change that sentiment. Despite Bernanke’s flooding the market with cash, greedy banks have been hoarding and the US consumer has finally caught on to the fact that now is not a good time to buy a home. Investors have been buying like there is no tomorrow, so I think the Fed might actually be content to let them experience the inevitable loss when interest rates finally have to rise.

Yen (JPY): Almost near the end of week two for the Japanese crisis, and thankfully there is no new news about nuclear problems. They just came out with a price-tag for the recovery, which is north of $300 billion dollars. Gulp.

Policy decisions by the few that affect the many are dangerous because you never can tell what motivates an individual. Part of the problem is that the majority of these decision-makers are NOT elected officials.

Social engineering, weak political will, ideology, and the need to be liked are all hallmarks of weak leadership, and we are seeing it around the globe time and time again. It is not surprising and quite unfortunate, but by not looking out for the “little guy” some of these governments may be in for a rude awakening.

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