Last week was rather flat, but did see intra-day volatility. A push and pull around those resistance levels, one morning up only to fall off the next down only to rally back. It seem that the dollar strength, bonds, and national debt has become more focused talking points. More and more economists are coming to the table about the pending fork in the road, try to inflate our way out or default. Concern about the dollar began to blossom when S&P downgraded the UK debt as it reached 100% of GDP. While the U.S. assured us (and Geithner assured China) – the question still remained. A rating agency in Brazil put U.S. debt on warning and a possible credit downgrade, and other foreign rating agencies (none as prominent as Moody’s, Fitch, or S&P) and none that are U.S. based have echoed that concern, but how far are we to trust our own credit rating agencies? Didn’t they give AAA credit to GM, AIG, Freddie, Fannie, as well as 100s of billions in mortgage backed security products?
The dollar story will remain on the forefront as we recover, only to land us in another economic concern – inflation. There are two debates with National Healthcare, first is the political one – (privatization, nationalism, socialism, etc.) both sides have their merits and faults – but there is another debate equally, if not more important. Can we afford it? The truth is we can’t (even if we wanted to). National debt (including programs) is in the trillions, the deficit is in the trillions, bailouts and loans in the trillions, so much debt that the Fed is printing money just to buy government debt (bonds) and now even Bernanke has warned Congress to stop spending. Other nations are also concerned about the National Healthcare plan, not the policy but the funding of it. Giethner promised foreign central banks that the administration would be lowering the deficit to 3%, but the new healthcare plan adds by NPR’s figures (rather low from what others have indicated) over 1.5 trillion in additional spending.
There is nothing wrong with debt, if you can afford it, and nations have had debt throughout history. But as we approach rather quickly 100% of GDP (and looking to exceed it) we come to a tipping point. The straw that will break the back is when the nation needs to borrow money just to cover the interest rate. We all know how interest only loans worked out for those mortgages, our government is on a fast track of interest only debt – but worst – they will have to borrow MORE just to make the interest payments. That’s analogous to paying your interest only mortgage with credit cards.
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Russia’s Gambit
http://www.bloomberg.com/apps/news?pid=20601087&sid=awOCMo25zbYY
Russian officials had made some comments last week that put more negative pressure on the dollar, the openly purchased billions in IMF debt, rather than U.S. treasuries. Unofficial talk coming out of Russia was that they might sell out of their U.S. dollar backed debt and move elsewhere. The BRIC (Brazil, Russia, India, and China) started to follow suit, Brazil and China have taken the plunge as well. Concerns last week that Bernanke would not be able to control rates and would have to print more money to buy treasuries to make up for the short-fall of foreign central banks became a serious concern.
Russia however made official comments after last week’s move into the IMF debt and said “It’s too early to speak of an alternative” to the U.S. as a reserve currency. They are probably right, but on the other hand their previous comments had driven the bonds down (costing Russia and other debt holders 100s of millions if not billions). After the comment the bonds began to rally again. But is this just a political speech to buoy the dollar, enough so that Russia can get back on the selling train? It’s true that there is not enough liquidity in any other single asset to take the place of the dollar as a world reserve currency. However, we may see a move to a more diversified basket, which will still create weakness to the dollar.
For now the BRIC is holding all the cards and the U.S. is sending envoys to ease their concerns about our debt and spending habits. The U.S. needs them to buy MORE debt, not sell what they have. Talk is cheap and all eyes (from afar) are watching the net debt mount and now pressuring concerns about this trillion dollar plus health care bill. Could a passage of the Healthcare bill spark a selloff of U.S. treasuries by foreign central banks as they grow concern about our mounting debt and deficit? I don’t know but if CNBC Europe and Bloomberg Asia interviews with foreign analyst and economist seem to think that it sure doesn’t ADD confidence to the U.S.’s ability to pay down the debt and reduce their deficit.
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Futures Pre-market
The futures are down following Asia and Europe as the recession might be ending but growth seems to be long in coming. The spreads are end – expect negative pressure on the market at the opening.
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Support / Resistance
We all know the numbers by now – we should crack below them today – but like all last week – it’s about the close.
INDU 8750
NDX 1500
SPX 950
RUT 540-550
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Conclusion
The G-8 finance ministers are drawing up contingency plans for rolling back the budget deficits and banks bailouts as the economy shows signs of “green shoots” to help ease concerns of economist how have indicated that if we stay the course inflation will be worst that anticipated. While it is premature to do anything today or even in the near-term – having policies in place is finally showing some foresight as to try to avoid inflation while at the same time making sure we don’t slip back into a credit crisis.
One of the big issues, while people are pointing to “green shoots”, is that the consumer (that real driver of the economy) is not seeing ANY “green shoots”. And the banking data looking good – primarily because they are not lending. This is the see-saw as to any decision by the financial ministers of the top nations. Bank data is looking better, TARP repayments, LIBOR easing, but the consumer data (other than confidence) is showing no new jobs, lower consumer spending, and no credit availability. There are always “green shoots” if you look for them, the problem is they may not be growing where you NEED them to grow. We can only ignore the consumer for so long – it is the consumer that needs to recover before the economy can.
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