Sorry for the no- post. I am working on a long article which turns out to be very difficult to write. I hope to have it done by Sunday so I can post it.
The markets are quiescent, awaiting the elections in a fortnight. Speculation has the Republican Party gaining many seats. If so this will be the end of the Obama presidency; his next two years will be a ‘Lame Duck’ regime. It most likely will be punctuated by Republican attempts to shut down the government or to use parliamentary means to stop financing government operations. I am not hopeful.
If the government cannot fund itself for more than a few days the outcome is likely to be catastrophic. The Treasury market will be disrupted and the effect on Treasury rates is impossible to predict – that is, will they go up a little or a lot! If the Treasury defaults – when the Treasury defaults – short rates could jump 2- 300 basis points in hours. The general credit squeeze would begin almost instantaneously.
The Fed would have to step up and buy Treasuries … and rates would return but uneasiness about the creditworthiness of the US government would creep in like shadows. Credit is confidence and trust and losing some of that cannot be good for either the functions of world economies or for the Republicans.
Then they would repeat the process.
Congressman Eric Cantor submits a new Republican majority will not shut down the government but the fact of his remarks suggests that is the first thing new Republicans will do.
Andy Xie has an analysis of Chinese F/X in Caixin which is worth a read.
People like Geithner would argue that China should raise the currency to force American companies to move production back to the U.S. I suppose that that is how the whole yuan appreciation idea may work. But, at what exchange rate would the American companies want to do it? American wages are ten times China’s. Should China increase its currency value ten times?
I suppose if unemployment grows further wage rates in the US might reach China levels particularly if president Hoover Obama remains in office for another term. Xie is an inflationist but only for America, not China. I think he has it backwards …
Graham Summers has a take on dollar moves, hedging the QE that may or may not take place:
Indeed, the US Dollar is giving hints of this, putting in what could be a potential bottom and reversal. Of course, it could be a GIANT head-fake, but the bounce from the multi-year trend line is something we need to take seriously in the context of Geithner’s and China’s recent statements/ moves.Have China and the US struck a “backroom” deal in which the US will drop the anti-China rhetoric and make moves to potentially halt a collapse in the US currency in order to calm its largest creditor (and THE one player whose moves ALL US bond holders are watching closely)?If so, then the lopsided inflation trade could be in for a SEVERE reversal which would see commodities and stocks collapsing as the US Dollar rallied a la 2008. Could Gold and Copper be telling us this is the case? Both commodities are seen as terrific discounters of future inflation. And both have reversed as of late and look to be potentially correcting.
