Peerless tries to explain the US$ weakness

I wrote the paragraphs below as an assessment on the US$ Outlook to my clients.  Since the report contains info useful to Macroeconomics as well, I thought it would be nice to include it as a blog post.

"Nuclear Quantitative Easing"

By way of a quick background, the term "Quantitative Easing" comes from the policy pursued by the Bank of Japan in the 1990's when they pumped vast amounts into the banking system to facilitate loans in credit in the wake of their Economic Crisis.  With the events of the Subprime Crisis crippling the US and the Worlds' Major Economies, we are seeing a return to the Quantitative Easing School of Macroeconomic policy.  

With that definition out of the way, the US$ Index saw a bounce from its lows in August 2008 to recent Highs in the beginning of March, 2009.  In fact much of its rally had taken place during the Lehman Brothers Default as well as the AIG crisis.  The reason for this strength had nothing to do with fundamentals but was simply the unwinding of the "Yen Carry Trade" where multinationals would borrow money in Japanese Yen at low interest rates and then lend in US markets at higher levels.  However, the US Treasury announced on 18 March a plan to add $1.1 TRILLION to the=2 0US Monetary Reserves over the course of the next year (Including $300 billion over the next 6 months).  When one considers that the US Monetary base is already up $1 Trillion from July 2008 until now as well the fact US Treasury Debt has grown from $6.5 Trillion in 2003 to $11 Trillion presently, the word Nuclear has been attached to Quantitative Easing by many other analysts.  Simply put, The US is printing money at a rate which could outstrip demand for its debt instruments (T Bills, etc) and setting the stage for huge inflationary concerns.  In fact, the yield for 30 year treasuries (which move inversely to principal value) is expected to be as high as 4.6%.

Since of course, it would be akin to yelling "Fire" in a crowded movie theater, the Central Banks of the World are trying to talk down this huge increase in US$ Money Supply.  The most recent US Treasury Report that lists the total debt flows in the US and what nations are investing in them shows a net outflow of $91 billion.  Yet, the individual breakdown has China increasing to a record value of US debt held and also has the Russian Federation at an all time high.  However, in spite of US=2 0statistics showing Russia purchasing $30 billion of US Debt since August 2008, their net FX reserves decreased $221 billion and the US$ share of the total Russian FX reserves is down to 41% from 47.5% (stats from Bank Rossii). Simply stated, the numbers don't exactly reconcile with each other and we would appreciate feedback from any of our readers more familiar with the situation.  

So, the question becomes, what exactly keeps the US$ from a total meltdown? The answer is that the system is now too large to fail.  The last thing China and Japan want to have happen is to see yields on their collateral rise sharply (remember the inverse relation between yield and principal) so they are not speaking out too strongly yet.  Also, the fact the Gulf Arab Nations insist on being paid for Oil in US$ serves in a way to make sure the US$ is on an "Oil Standard".  It should be noted that this second point is of great chagrin to the Fundamentalist Regime in Iran as well as other radical Islamists who feel Governments in places such as Saudi Arabia are merely "de-facto" extensions of the US and its policies.  

In the future, we expect to see a very gradual movement away from pricing in US$ as leaders such as Mr. Luiz Ignacio Lula da Silva of Brazil are calling for direct exchange of currencies between China and Brazil on commodity trades.  However, the short term result of the 'Nuclear Quantitative Easing" Policy will mean cheaper commodities on a US$ basis and spark an interest in buying by large end users such as China.  In fact, Beijing is in the process of allocating $4 trillion Yuan (approx $500 billion) for the building of infrastructure projects in China.  The direct result of which can be seen in the jump in the Baltic Freight Index to a 7-month high due to Chinese purchases of Steel, Iron Ore, Copper, etc.

The Gitmo Fiasco

It has been a while but I am not going to write something funny about the trading floor today. Instead, I am going to discuss the US Government's inability to close down Guantanamo Bay (Gitmo).

Since the opening of the Camp X-Ray in Cuba in 2001, activists in this nation as well as the rest of the world were outraged at the treatment of suspected Al-Qaeda terrorists. At first, I had no time for the points made by the people against the Gitmo facility as it seemed to be prudent to stop impending attacks on US Soil and after all, some of the detainees might have been directly involved in the 9/11 attacks.

However, as the "War on Terror" dragged on and it became obvious many of the prisoners in Gitmo didnt belong there because they were falsely accused or simply guilty by association, the time seemed right to close the facility and either release the prisoners or transfer to the US Mainland the ones who actually had committed crimes of terror. Nonetheless, the Bush Administration lept the facility open and angered many of the Liberal Democrats in the USA, who then used Gitmo as the poster child for the fear of the removal of Civil Liberties in the future.

Were the "liberals" correct? It is very possible that they were. Detaining humans for such an extended period without even the right to a trial or at least to hear the evidence against them is something one would expect from Stalin and the Gulag Archepelego. Even the Nazis were tried at Nurenburg and were subjected to due process of law. Yes, the point exists that the Nazis were proper Prisoners of War and afforded rights under the Geneva Convention while the suspected Al-Qaeda represent an organization instead of a nation and therefore, exempt from Geneva Convention supervision. However, if the prisoners were captured on a battlefield such as in Afghanistan or Iraq, they should be given a fair trial and released.

When President Obama took office, he pledged to close the Gitmo Prison and this decision was hailed around the world. After all, the United States should be the role model for a free and open society. It is simply against what it means to be an American to have a system in place that can detain people indefinately without a trial. After all, where does one draw the line on detaining someone? Is it reserved for planning violent crimes of terror only or does it extend into peoples' right to free speech when they can preach vitriol against the Government? When is the line extended to people who simply speak out against the President?

Yesterday, the Senate (which has a Democrat Majority) voted against shutting down Gitmo because it would involve relocting the prisoners on the US Mainland. To me, this vote is the ultimate in hypocrasy because it says "we think it is inhumane to subject people to torture and detain them indefinately but we dont want to actually intern these said people inside the USA proper."

It is almost a given that if it was Bush who decided against closing it, people would be in the streets and Amnesty International would surely issue an condemnation against the US Fascists. However, everyone is strangely silent now.

I want to see all the people who want to try Bush and Cheyney for War Crimes get outraged now that there was a majority that could have voted to close the US Gulag in Guantanamo and waffled when the moment of truth came.

Peerless gets ready for the Annual Meeting in NYC.

Ah yes, the 1st week of May.  For everyone else in the world, it means the weather is warmer and Spring should be in full swing.  For Peerless however, it simply means that the annual meeting of the people who trade his commodity is about to take place in NYC at the Waldorf Astoria.  Therefore, a week of parties that is somehow the Commodity Trader's version of the Cannes Film Festival is about to take place except instead of such luminaries such as Jack Nicholson, we get people like the Hit Man I was introduced to on my 1st day as the VIP's.  

Don't get me wrong, people from all over the world come to NYC for this annual party/dinner.  In fact, if someone wanted to become acquainted with the movers/shakers of my profession, this week would be the time to do so.  However, this party is much more scaled back than it used to be since we are in recession and also because London has a party every 2 years that is much better than anything NYC can do.  Nonetheless, Peerless remembers some funny stories from Annual Parties of years past.

Back in the mid 1990's, Peerless had a large client from an Asian Nation who used the NYC Dinner as an excuse to come to NYC and do all sorts of things that would earn them a divorce in their home nation.  One year, a group of 6 people from the aforementioned company came to NYC and it was Peerless' Job to show them around NYC and cater to their every whim.  When Peerless suggested visiting the top of the WTC (remember this was 1997), they responded they wanted to go to Scores (the mecca of strip clubs in NYC).  So, Peerless hits up his Boss for the Company Credit Card and takes the people to Scores.  Everyone (including Peerless) is having a grand old time until one of the Asians realizes there is a Stripper from his Nation dancing there.  Not only was she from the said nation, but she had dyed blonde hair, a fake tan, and the largest breast implants Peerless ever saw on an Asian woman.  The Traveling Delegation get totally horrified and insist we leave right away. So, apparently it was ok for women from other oppressed 3rd world nations (Poland, Russia, etc) to be strippers but no one from their country would EVER do that sort of thing.

In any event, we ended the night in Chinatown at 4 AM all singing Karaoke and we literally held hands and Sang the Drunkest version of "We are the World."  So- Precious.  

This same delegation wanted to follow up on their visit to the Strip Club the next Day by going to buy Porno Movies that were illegal in their own Nation.  So, Peerless takes them to an XXX store on Times Square (this was before Disney took over).  At one point, one of the group actually says to Peerless "I would like something that resembles a Love Story but with lots of Dirty Sex involved."  Thinking 99% of all Pornos just involve sex and no one really pays attention to the Plot, Peerless turns and suggests "Big Black Babes Bare Butts" (it was in the "Bestseller" rack).  

In fact, Peerless has been asked to play "Matchmaker" more than once for a visiting client during Sugar Week. Another client (who was single and no longer in the business) wanted Peerless to arrange a High Priced Escort for Him.  So, Peerless had to call around to several places and finally came up with the one he felt was the best choice.  As a side note, the client paid for the lady, not Peerless.

Another time, Peerless and another broker from the floor were at the Sugar Dinner when a trader from another country walked by.  The other broker, thinking Peerless knew about the other guy, asked if he had to buy him any Hookers this year.  Peerless decides to try and play along and says not that year.  The other broker says he once spent $1000 for a hooker for the guy and the guy still didn't give him any business the following year. 

With all of the above being said, Peerless would like to point out that these events happened over 5 years ago and all the above people mentioned are no longer actively involved in the trading business.  Peerless is also certain that other people would be happy to tell stories that are more incriminating than those above but he chooses not to do so because he doesn't want to get people in trouble.