WHAT, ME WORRY?

Inventory report from Chicago came out this morning and the stock market promptly tanked on less than glorious information. Then about 1:30 the dollar hit it's lows for the day and the market turned right around and lept into positive territory. I guess the FX traders were telling the markets that given the inventory number the Fed was probably going to kept its policy of selling money for nothing and the stock guys like free money. Makes sense I guess--not to me but to someone.

There doesn't appear to be any bottom as far as the dollar is concerned and if the is concern among The Leader's gang, I sure can't find any. I keep wondering what effect this is going to have on the major holders of dollars as the reserve currency but so far there appears to be little overt reaction. As of end August, according to Mayor Bloomburg's boys the major holders were (in millions)
China 2.100
Japan 992
Russia 403
India 261
Brazil 219
With the possible exception of Japan (and they just changed governments) among that list I can't really find a real good friend of Uncle Sammy. This continues to make me unhappy especially when there is a growing nexus in the BRIC countries--Brazil, Russia, China, India--that perhaps their interests in the world are not being respected in the manner in which their respective checking account balances should command. An added degree of unrest is created now that The Leader has just granted them oversight via the G-20 of the way we run things around here.

Having said that, my really smart friend, Larry, is still on his "dollar trap" deal with the Chinese arguing for the status quo on the basis that there is no other alternative for the time being. He may still be right but at least he's more in my camp these days in regard to switching dollar investments from straight Treasuries to inflation protected instruments such as TIPS. Larry's an economist and in this case like any economist the thought process is, "assume a back-room deal." Uh-huh. Lawyers and bankers take one look at that assumption and ask, "do you have any idea what effect that would have on all the other investors out there?" Treasury would never sell another straight bond except to the Fed. The fact is fewer and fewer people want to hold out debt given this administration's fiscal posture which leads me (and Larry) to believe that you are going to see a ramping up of independent monetary zones for the RMB and the Euro as well as a growing international pressure on the U.S. to put our house in order which has not yet appeared. Commodities and energy I suspect will become more and more the investment of choice as no other market really has the depth for all the liquidity floating around out there. This too, aint good for Uncle.

Of course, one can never discount a political event coming into play in this very dangerous situation where some many of our rivals (a relative term) hold so much leverage in their dealings with us. It is clear, for example, that China's long term interests in Iran are far different than ours. A short term vs. a long term trade-off in regard to Iran would be a difficult decision for them in my view. I don't like the prospects facing us right now. I'm not at all certain that events may move much quicker than my friend Larry anticipates. One thing we tend to forget from time to time is that we are all playing in the same arena but some of us are playing vastly different games or the same game under vastly different rules. What is logical for us needn't be for anyone else and the building of a democratic consensus is at an extreme disadvantage as opposed to management and governance by fiat. Then again, given the past eight months, maybe The Leader has figured that out.

See you next week.