Hank Paulson Posts on Forex Blog
Is Systemic Risk Over Hyped?
Jul 15, 2008
Certainly systemic risk is a real threat to the US Dollar.
With Fannie Mae and Freddie Mac woes (each down 75% year to date) and other banks encountering credit related problems it is easy to be glum. With record energy and food prices it is easy to be pessimistic about US growth.
But is it really financial Armageddon?
Are traders justified in running up the Euro and Pound in the face of more pessimistic data out of Europe?
In the short term, perhaps yes.
In the medium term, I don't think so.
What the US has going for it
This is not your grandfather's depression.
First, you have a Fed with far fewer constraints vis-a-vis the 1929 Fed. Indeed, the Fed is now run by monetarists who have extensively studied and argued how the Great Depression could have been avoided. Are they wrong? Only the markets can answer that in the long run, but early indications, while sometimes obscured in a sea of negative presidential year rhetoric, are to the contrary.
Consider this, the Fed today has increased expectations for annual GDP growth to 1.0% - 1.6% vs earlier forecasts of 0.3% - 1.2%. In addition, monthly job losses have held below 100k, far below previous recession peaks of 300k+. Q1 GDP was revised upwards from an annual rate of 0.6% to 1.0%. Exports remain a source of growth while inventory is tightening (meaning exporters are only buying what they can move).
And in a great sign for the tech sector, Intel posted prfit gains of a whopping 25% today. I have long suggested the housing recession would end in part with a Web 2.0 / High Def / extreme bandwidth tech cycle.
Second, the US government has bankers in all the right places. Hank Paulson of Goldman Sachs fame runs the US Treasury. And now the US Senate has finally confirmed a banker for the Fed in Elizabeth Duke. These 2 combined can provide an immense amount of insight and necessary guidance in steering the US through the economic storm.
Third, after entering the credit crisis while sitting on their hands, various entities have become innovative and expanded beyond the standard usage of interest rate policies to move markets. This was first demonstrated by the Fed when they negotiated the sale of Bear Sterns to JPMorgan Chase and opened the discount window to investment banks.
And lately, this innovation has gone further. Including a) the Fed opening the discount window to Fanny and Freddy b) the Treasury asking congress to grant emergency powers to expand GSE credit facilities and purchase equity and most recently c) Christopher Cox banning naked shorts on Lehman Brothers, Goldman Sachs, Merill Lynch, Morgan Stanley, Fanny, and Freddy
If the shorts get too bold, and the Treasury is granted permission to buy equity, I trust that Hank Paulosn knows how to coordinate a short squeeze. While perhaps unethical and smacking of market manipulation, it is a possible strategy that Mr. Paulson may use to restore value in Fanny and Freddy, and thus renew investor confidence in the mortgage markets.
As Mr. Paulson said before the Senate today, when you walk down the street with a squirt gun, you are likely to have to use it. When you walk down the street with a bazooka, others are unlikely to test you. So it shall be with the Treasury and GSE shorts.
What the Eurozone has going against them
In short, a crises of false hopes.
Today, some traders are fleeing to the Euro in the mistaken belief it is a safe heaven against a systemic crises in the US.
They could not be more wrong.
Consider the latest data, the ZEW Survey came in at an astoundingly low -63.9, European auto sales are down -8% year over year, Italian GDP has been slashed from 1.0% this year and next to 0.4% in 2008 and 2009, and ECB members now warn of growth risks despite their mandate to keep inflation in check. And that all happened today, when the Euro set fresh new highs.
As things settle down in the US, Euro longs may be in for a rude shock as markets readjust for recent macroeconomic data.
Indeed, ECB Council Member Vito Constancio has sounded rather Greenspanian circa 2004. He warned "Under normal circumstances, a rise in the interest rate by the ECB would have resulted in higher medium-term rates and a higher euro. Well, the exact opposite happened," Sounds like the EU is facing their own conundrum.
With the global economy slowing down, fx traders in late 2008 / early 2009 are likely to see an environment where the US is raising rates while Europe, the UK, Australia, and New Zealand are cutting rates and the Swiss and Canadians at best hold firm. Such an environment will put a smackdown on the current Carry Trades.
Again, don't get me wrong. This is NOT short term advice. I would not put a stop in the EURUSD below 1.5781. But with FX markets currently ignoring macroeconomic data to focus on systemic risk, it is better to keep a clear perspective on the entirety of the big picture.
ZEW Survey, Credit Crunch, Hank Paulson, Bernanke, EUR, USD
Fed, US to Bail Out Fanny and Freddy
Jul 13, 2008
On Sunday, US Treasurer Hank Paulson and the Fed announced 4 steps to secure the future of Fannie Mae and Freddie Mac.
1. The 2 entities can now borrow from the NY federal reserve. This is the same emergency lending facility granted to investment banks earlier this year.
2. The Federal Reserve will play a greater role in any future changes to their regulations
3. The US will expand the lines of credit (currently $2.5 billion) provided by the federal government
4. The US government will be able to buy equity of the 2 giants.
Steps 3 and 4 still need congressional approval. In an election year, they seem likely to pass. Chances are further improved by the perception that Senator Chuck Schumer (D - NY) may have had a role in the collapse of IndyMac.
One has to wonder why step 1 (access to the Fed discount window) was not done earlier this year when the privilege was extended to investment banks.
Shoring up the giants is mission critical for the US. Between the 2, they hold $5 trillion in mortgage debt. Just 2 years ago, they were underwriting roughly 30% of all mortgages. Today, that number number has grown to 70%.
With all the attention drawn to Fanny and Freddy, one has to ponder the fate of Lehman Brothers.
Credit Crunch, Hank Paulson, Fed
Forex Outlook July 6 - July 11
Jul 6, 2008
Welcome to another fun filled week of forex trading.
This is the week of trade reports! Germany, France, UK, and Japan report Wednesday. Canada and the US report on Friday.
Beyond those reports, the week is largely dominated by speaking opportunities. Fed officials have 3 major speaking engagements, and the Bank of England Rate decision comes on Thursday.
G8 Summit July 7 - 9
Sun July 6
9:30pm German Wholesale Price Index (expect 1.0% MoM, 9.0% YoY)
Mon July 7
4:30am UK Industrial Production (expect -0.1% MoM, -0.7% YoY)
11am US SF Fed President Janet Yellen Speaks on Economic Outlook. She is considered an inflation dove.
Tue July 8
8:30am US Fed Chairman Ben Bernanke Speaks on Mortgage Lending
10am US Pending Home Sales for May (expect -2.5% MoM)
2:30 pm US Richmond Fed President Jeffrey Lacker speaks on Economic Outlook. He is considered an inflation hawk. This was demonstrated when he dissented with the FOMC in 4 straight meetings in 2006 by voting for rate increases.
7pm UK Consumer Confidence
Wed July 9
2am German Trade Balance for May (expect €18 billion, -€0.7 billion from previous)
2:45am French Trade Balance for May (expect -€4 billion, -€0.3 billion from previous)
4:30am UK Trade Balance (expect -£4 billion)
5am Eurozone Q1 GDP Finalized (expect 0.8%, same as preliminary)
10:30am US Crude Inventories
7:50pm Japan Trade Balance for May (expect ¥487 billion )
10:30pm Australian Unemployment
Thu Jul 10
7am UK Bank of England Rate Decision (expect hold at 5%)
10am US Fed Chief Bernanke and Treasurer Henry Paulson testify before Congress
Fri July 11
7am Canada Employment (expect +10k)
8:30am Canada International Trade (excludes services) (expect 5 billion)
8:30am US Trade Balance (expect -$61 billion)
Bank of England, trade balance, Hank Paulson, upcoming reports, Fed
Worst of Credit Crisis Over - US Sec Treasury Paulson, Merril CEO Thain
May 7, 2008
Both the US Secretary Hank Paulson and Merril Lynch CEO John Thain came out with a positive outlook on the credit crisis Wednesday.
In an interview with the AP, Hank Paulson remarked "we're closer to the end of this than the beginning." However, he cautioned that rising fuel prices will reduce the effect of the stimulus package. The first batch of stimulus checks went out last week - some via direct deposit, others via mail.
CEO Thain indicated that investment banks are likely to reduce the massive losses reported over the last year. He cautioned that banks with large consumer exposure were likely to see some more pain. Specifically, credit cards and home loans are likely to see more delinquencies going forward. On a positive note, Mr. Thain indicated Merrill was unlikely to seek more capital.
It is important to note that Mr. Thain worked at Goldman Sachs while Hank Paulson was the CEO. This 1-2 punch of optimism is almost certainly coordinated.
Read more at MSNBC and CNBC
Credit Crunch, Hank Paulson, USD
