Find these Mauldin/Weldon comments of interest...
i.e. Fed buying US treasuries to keep interest rates low while simultanously trying to devalue US$ against other currencies. Believe this is the US/Fed gameplan...
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And thus we are now set-up for the conversation with one of my favorite macro analysts, Greg Weldon. He answers some of Bill's questions, writing in this afternoon's Metal Monitor www.metal-monitor.com
"The Fed is buying US Treasuries, and has now for two consecutive weeks, as revealed within last night's Fed money supply data. Japanese investors are buying UST, and ....increased their NET exposure by a whopping $12 billion, in just the latest week.
"...And, last, but FAR from 'least', Foreign Central Banks are buying US Treasuries, as reflected by a string of weekly increases in Custody Holdings, including the $3.2 billion increase posted last night.
"And yet ... USD-JPY is still ... lower."
"We feel that a MAJOR shift is taking place, where the US and Japan might agree, to allow the USD to depreciate...."
This echoes readings from others over the past few weeks, but Weldon crystallizes the trigger point. I sense we are ready for another round of dollar depreciation.
If the dollar were allowed to drop against the yen, might other Asian currencies allow it to drop as well? Slowly re-adjusting the trade balance and the value of the dollar?
If Asian countries buy fewer dollars, thus allowing their currencies to rise, this would normally mean that US interest rates would rise. Not only would their US bonds be worth less in terms of their local currency, they would also lose as their US bonds fall in value. A double whammy! It is the old supply and demand conundrum.
But if the Fed quietly agrees to buy enough bonds to maintain the value as they seem to be doing now, and foreign governments don't actively sell (in effect, they just buy less), the hope would be a slow re-setting of the value of the dollar, a reflation of the US economy and a lower trade deficit.
Weldon believes the Fed does not give a time frame because they don't have a clue as to what the time frame is. They are playing this one by ear. If they announce an inflation target north of where we are today, would that spook the bond market? Would they feel boxed in if they set a target at 2% and then decided we needed more stimulus even if we were already at that same 2%?
Think of the European Central Bank. They set inflation targets and then came under enormous pressure to ease their money supply as some of their main countries went into recession. Greenspan does not want in that box. Trust me on this one. He made that very clear in Jackson Hole.
Everybody and their dog knows that the dollar is going lower. The debate is only about how far. If the Fed were to allow interest rates to rise as foreign central bank buying slows up, that would trigger higher home mortgage rates, which would put in jeopardy home values. Deflating home values, as Weldon points out, is the last thing the world or the Fed wants to see.
If the world (read China and Asia) pulled the plug on the US dollar, which they could do in about 15 minutes, the result would be a world wide depression. Nobody wants that. Everyone's interest is aligned in keeping the game going. They want the US to keep buying and they want to keep selling.
However, it must now becoming apparent even to central bankers that the current trends cannot continue. You cannot keep racking up $500 billion trade deficits forever. You cannot keep adding up $500 billion dollar government deficits. We no longer simply "owe it to ourselves." Since foreign governments are buying an ever higher percentage of US government debt (they currently are at an all-time high of 46%), the current trend if left unchecked means eventually the US government owes trillions to foreign nations. When you are increasing the foreign debt by $500 billion a year, it does not take long.
A rise in rates would mean the US would owe hundreds of billions of tax dollars in annual interest payments to foreign banks, unless the trends are stopped. Such an event would mean an unraveling of the current world economic structure.
Thus, the dance truly begins to allow the dollar to drop. Hopefully slowly, while the Fed keeps rates low, hoping the US economy can begin to produce jobs.
The Fed issued a statement after its meeting this week. It was word for word the same as the one in August, with two minor differences. The one to pay attention to was "a phrase in the next to the last sentence in the second paragraph. In August they said ...... 'labor market indicators were mixed'. In September they rephrased that to..... 'labor market has been
weakening.'" (Courtesy of Art Cashin)
I attended a private reception yesterday evening over in Dallas for Jimmie Rogers (former Soros partner and author of Adventure Capitalist) given by David Tice, who runs the Prudent Bear Fund. There were a few genetically pre-determined bearish souls in attendance. One complained to me that recent Fed actions are only going to make things worse -- that we need to go through the economic re-balancing, deal with the recession that would occur and move on, or words to that effect. He was from the "take your medicine now" school of thought.
But that will not happen. The members of the Federal Reserve are programmed, deep within their economic DNA, to fight recessions with all the tools available, and especially a deflationary recession which might develop. They do not believe that it will make things worse.
Weldon makes great sense when he says we may be at a cross-roads in the value of the dollar. I also believe the Fed will do what they feel they have to do to help the world adjust and to try and hold back the forces which would raise rates and shut off a recovery that has been produced by the most massive application of stimulus in the history of the world and that has yet to produce jobs.
If they believed the recovery was powerful enough to properly develop on its own, they would not be using the word "considerable." They would be raising rates, not talking about a "the probability, though minor, of an unwelcome fall in inflation" as they did in the recent reports.
We live in interesting times. Yes, indeed we do. Think gold.
