Putting the spice back into investing.

Fed watching

Monday, January 31, 2005
This week will see another FOMC meeting which will most probably provide us with another 25bp hike and some much watched language regarding this august conclaves further intentions.

The thing many people will be looking for is if the "measured pace" statement remains in place. Markets are generally looking for the Fed to hike up to 3,5% by year-end. This should put us somewhere near the (cough) neutral Fed Funds rate. So does the Fed need to change the verbiage it puts out? Is there still fear out there that the FOMC will hike quickly? If there isn't we should ask ourselves if the Fed needs to retain a qualitative phrase such as "measured pace" in lieu of more neutral and - quantitative - wording.

The economic backdrop against which the Fed is working is - at least to this commentator - pretty murky. I'm pretty sure that we'll see robust, but below consensus, growth this year. Before you ask: no, I don't really see inflation popping up from behind a rock somewhere.

So having said that I would conclude that Fed watching will be fun this time around as we look at how the Fed communicates a rate hike which we just "know" will come. More fun will be had in the middle of February, when Alan Greenspan testifies before the House and Senate.

Intense Workload

Wednesday, January 26, 2005
Lots of pressure at work - so sorry for my not posting. Will try to put something up tomorrow. There's an offsite on Friday so no posting there.

Command economy anyone?

Tuesday, January 25, 2005
Overnight news from China showed that economic growth continued at a fast pace in Q4. 9.5% GDP growth is high enough to give most other policy makers a bleeding nose.

The fascinating thing about this number was that it was accompanied by another number which was much more subdued. Inflation came in at a very modest 2.4%. A look at the numbers shows that the governments cooling activities seem to be paying off. Exports and consumer demand were very robust while investment in fixed assets was slightly lower.

This data makes me more confident that China is indeed managing a soft landing and has started to contain inflationary pressure. I believe (and this is not the consensus view) that Chinese inflation will come in below the 5% rate that we saw last year and which gave rise to much angst about the further economic perspectives for China. So in all this is good news for people playing the China story via commodities and commodity linked currencies.


Friday, January 21, 2005
Many people spent large amounts of time last year worrying about inflation. I can remember reading lots of posts and "serious" analysis in the mainstream media which went on about the dangers of inflation. The hike in oil prices was seen as one of the proverbial horsemen of the apocalypse and people had serious arguments about the validity of looking at core vs. headline inflation.

If I look around right now I can't really say that anything much has happened. Inflation is still subdued - the headline number actually managed a little fall a couple of days ago. Economic growth, high energy prices and the seemingly insatiable Asian demand for commodities hasn't yet caused a massive inflationary push.

This is one of the reasons that I am more than a little skeptical about the future performance of the US economy. A whole host of leading indicators is pointing towards a slowdown which should/could occur any time now. If the Fed continues to tighten while the economy is decelerating we should stop worrying about inflation right now.

One person isn't worrying about inflation - Mr. Market has consistently revised his inflation expectations downwards over the past couple of months - and I for one trust his wisdom.


Thursday, January 20, 2005
Here I am sitting in the 30th floor of an office building in one of Europe's financial centers looking out into the semi-darkness of the morning. As always the screens in front of me provide me with my daily ration of economic news.

A look back at yesterday shows me that the US (core) CPI rose at 0.2% which is exactly the number that came in the past two months. This makes for an annualised rise of core inflation of 2.0% in Q4 2004. This ist well down from the numbers we saw in Q1 and Q2 2004. Year on year core inflation was steady at 2.2%.

The headline CPI number was actually down 0.1% because of lower energy costs in December (which sounds better than saying "the cost of energy rose by almost 20% in 2004 and declined slightly in December"). In all I believe that inflation pressure will remain low over the coming quarters. This allow the Fed to rexeamine further rate hikes sometime in the spring.

Long time readers of this blog will know that I'm not convinced that the pace of US economic expansion is sustainable. In fact, I'm pretty convinced that the soft patch we saw in the second half of 2004 will continue into Q1 2005. I do have to admit that this negative view was somewhat off the mark - I was expecting that the Fed would stop hiking by the end of the year.

Currency afficionados (and lots of other people) will look at what President Bush says in today's inaugural address. Any claim that his administration will "cut the deficit in half" will probably move markets for about 25 seconds or until people start thinking about what this will entail.

What email can do...

Wednesday, January 19, 2005
David Tufte turned an email exchange we had a short while ago into a thoughtful post on constraints and lifestyles.

TICing up

The November TIC data (aka foreign cash infusion) came in above the $70bn I was looking for in my last post. The final talley was $81bn which gave the US currency a brief respite. Most of the inflow was due to higher purchases of US fixed income assets. Most of this comes from our friends, the Asian central banks who continue to throw money after the sinking dollar for their own selfish reasons. Not much other news - the number the market is looking at today is the CPI which will be out at 13.30 GMT.

Monday Morning

Monday, January 17, 2005
The Japanese finance minister Sadakazu Tanigaki started verbally shifting Japan back into intervention mode by saying things like:
"We will take decisive action if foreign exchange rates fail to move in such a way [Foreign exchange rates should move in a stable manner and reflect fundamentals of economies]"
In a not so veiled reference to the (cough) imbalances in the US economy he also went on record thusly
Tanigaki said each country's efforts to overhaul their economies should be the main tools to rectify global imbalances, rather than adjusting foreign exchange levels
Which is kind of funny if you look at what Japan has been doing over the past couple of years - persih the thought that they "adjusted" the value of their currency.

Speaking of currency: Tuesday will see the release of Treasury TIC data for the US which will show us how high portfolio inflows were into the US in November. This number has been looking weaker of the past couple of months in tune with the declining US currency. Let us all hope that the November Number nudges up to something around $70bn. Anything arount the $50bn we saw before could be very dollar bearish.

Great Cartoon

Friday, January 14, 2005
Great cartoon!

Read this

Pimco's Paul McCulley does an excellent job of Fed watching (as always). He also manages to explain the mechanism by which the Fed massages the economy in a way that is so persusasive that anyone will "get it" quicker than I can write "transmission mechanism".

Hey Amigo, Want Some Tequila?

I was talking to a colleague a couple of days ago and he very nonchalantly compared the current situation in the US economy to the Asian currency crisis back in 1997. I was just about to say something along the lines of "come on, this is completely different" when it hit me: it isn't all that different.

We are looking at a country which threw open the sluice gates of easy money and which was kept afloat by misguided foreign investors who were intoxicated by a growth story which was actually mostly driven by their hunger for domestic assets.

This kind of situation goes on until someone wakes up and smells the coffee. This is what essentially took place in Mexico ("the tequila crisis") and Asia. Could the US be next? Probably not - the Fed chief and quite a few other officials have taken it upon themselves to talk down the dollar so that it can fall in a dignified way instead of just collapsing. At the risk of sounding callous: this is like surfing just in front of a tsunami.

If this particular surfer bails, the answer to the question in this post's title might just be: "No thanks, I'll have a Bud!".

Long time no see...

Thursday, January 06, 2005
Switched Jobs
No time at all
@ home internet access back as of yesterday
Looking forward to blogging again...