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Thursday, October 21, 2010

What Ya Talkin' Bout Timmy?

The title to this post paraphrases the late Gary Coleman’s famous tagline ”What ya Talkin’ ‘bout Willis?” from the show “Different Strokes”. When Gary’s character heard double speak or something perceived contradictory from Willis his brother played by Todd Bridges, he would blurt out the tagline and the camera would zoom in on his face looking perplexed. These days the general and investing public has been cast in the role of Gary Coleman’s character Arnold. I can visualize people all across this great nation of ours listening to the politicians and talking heads with the comments, theories and explanations tossed about and there must be millions of “Arnold moments” each and every day.

Just turn on the news and you can hear genius at work like Nancy Pelosi who said “Unemployment check are the fastest way to create jobs” We also have another famous Nancy quote regarding the Obamacare bill, ”We need to pass the healthcare bill to find out what's in it” “What ya talkin’ bout Nancy?”

I don’t mean to pick on poor Nancy as everyday you can hear these contradictory or inane statements from all levels of government and media and it leads one to wonder if anyone really knows what is going on. This leads me to today’s whipping boy Timmy “Turbo Tax” Geihtner who has talking out of both sides of his head yesterday.  In the first article Timmy was quoted on October 18th 201 as saying “we’re going to work very hard to make sure that we preserve confidence in the strong dollar.” Timmy was making his case for why the Chinese Yuan should rise. The following afternoon October 19th on Bloomberg an article appears titled “Geihtner Weak Dollar Seen as U.S. Recovery Route Versus BRICs”. This article flies in the face of the strong dollar argument even though Geihtner is quoted again in this article with the aforementioned strong dollar quote. This type of double speak is enough to make the market say “What ya talkin’ bout Timmy?”.  Mixed messages are nothing new in politics or the media and managing the media and the markets are part of the MOPE or management of perception economics, practiced by the Government and the FED.

Reading between the lines one realizes that both the Government and the FED want a lower Dollar and more inflation, but they want it in an orderly fashion. The pronouncements appear to me to be specifically timed and targeted to walk the dollar down in an orderly fashion. I am aware of the oversold condition in the Dollar, but it appears that if no one came out and said anything to support the dollar the oversold condition could have turned in to a waterfall decline, which would not have been good. Of course market actions sometimes defy logic in the short term as they did on Tuesday when China raised its rate .25% which you would have thought would have driven the Yuan up but market stupidity used it as an excuse to rally the Dollar from oversold.

The Dollar could have room to run but as I said yesterday I view this as a trade more than a trend. In fact today the Dollar is retreating from its over 1 point gain yesterday and the markets and precious metals are up too as we await the FED's Beige book.

In yet another "What ya talkin' bout Timmy?" moment an article appears in the Wall Street Journal titled, " Geithner's Goal: Rebalanced World Economy", which is nothing short of more posturing for the G20 meeting. To start with Timmy and company have not proven that their ideas could even rebalance the US economy let alone the world's. In the article he goes on to state that they want to set norms for currency exchange and the rationale is that it is not fair that some are overvalued and others not. Once again the command and control everything philosophy of the current Washington culture wants to spread its octopus tentacales out and ensnare the whole world. News flash Mr. Geihtner life is not fair and the reason for currencies being valued the way they are is a reflection of the underlying economy of the host country, interventions aside. He should be taking the opposite argument that currencies should not be managed at all, but instead the market will fairly value them and this would be a balancing mechanism. If a currency is over or undervalued the way to fix it is to address the basic problems in the economy not manipulate and distort the currency markets. The world is full of diverse economies and trying to manage the currencies will end up creating distortions and even larger problems, just look at the Euro zone and its problems for example. The Euro zone has rules that dictate deficits and other aspects of an economy and a managed currency over a diverse region, and you can see this resulted in the crisis we see unfolding today.

Now to be fair Geithner is not talking about a one world currency at least not yet but instead managing all currencies to be "fair". I believe this scenario will not come to pass because to do so would put each countries economic sovereignty at risk and that is a gamble that no country wants to take. In fact at the conclusion of the article, the Chinese representative had a quote concerning their trade surplus, which would fall under such a managed currency regime and it shows exactly why this will not work. ....A spokesman for the Chinese Ministry of Commerce, Yao Jian, said last week, "Other countries have no right to comment on what is a reasonable level for a country's trade surplus." There you have it no country wants to put their economic well being in the hands of bureaucrats who have only academia and think tanks to guide them. An overarching currency management system will not work unless all the participants feel it supports their own interests and economic sovereignty because giving those up is tantamount to surrendering your political sovereignty, which no leader or people for that matter would do. Would the US Government or the average US citizen want to give up the ability to manage our own fiscal house as conditions dictate or would we blindly implement orders from some commission in Paris, the Hague or Bejing?

The bottom line here is that all the buzz related to the dollar from not devaluing to re-balancing falls under the "do as I say not as I do" heading. I am more convinced then ever that we will see dollar devaluation, because as Shakespeare once penned, "The lady doth protest too much" and right now Timmy "Turbo Tax" plays the role to a tee. We have seen this we will not devalue stance play out before in other countries where the leaders have made firm statements that devaluation was out of the question, with out fail shortly there after the devaluation appears, just think back to the "Asian Tigers" in the late 1990's. The argument for investing in things versus paper gets stronger by the day.

On a separate note it seems that the mainstream press is picking up on the growing Municipal bond problem that I reported in my blog post “Municipal Jenga”. Today Forbes released an article titled “Municipal Bondholders Must Worry About Default”, which is worth a read and is a nice follow up to what I had reported.


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