Before I begin, allow me to invite you to a special event on Sunday, March 7 at 5:30 pm EST. At that time, I will be holding a free session of my online trade room for all who might wish to attend. Sundays are usually fun (and profitable) as we go over what’s happening in the markets and look to take advantage of the opening gap in prices.
All you need do to attend is send an email to email@example.com. I’ll put you on my invite list and send the log in instructions that Sunday morning.
Fed Chairman Ben Bernanke will reiterate in testimony to Congress on Wednesday and Thursday that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
I would expect to see the dollar weaken against the PEAK currencies (pound, euro, A$ and K$) in anticipation, but whether the stronger dollar trend can be bucked is another matter altogether.
The risk of sovereign default(s) is certainly still present and seeing one or more happen would not be surprising to many economists (Greece has a higher debt-to-GDP ratio than Russia and Asian nations had during the last round of sovereign defaults in the 1990’s). Harvard economics professor and former chief economist at the IMF Kenneth Rogoff said on Monday that sovereign defaults could lead to slower global growth although he doesn’t see another recession on the horizon. Bur he also added that China is at risk of a financial crisis due to the extraordinary amount of new debt that’s been created as a result of the government’s stimulus programs.
Former Fed Chairman Allen Greenspan said on Tuesday that the world economy has undergone “by far the greatest financial crisis globally ever.” He also called the recovery “extremely unbalanced” as high income consumers and large businesses benefit from a rebound in stock prices.
This “recovery” has been engineered by the Fed’s enormous liquidity injections, as it “electronically” printed money to lend or buy securities that were (and are) nearly completely illiquid.
The banks remain paralyzed with enormous losses which still remain on their books, and the amount of credit extended in the economy declined by the most in history during 2009. The large commercial lenders are holding over $1 trillion in reserve at the Fed-money that is not being circulated and therefore is creating no velocity.
Commercial real estate is basically a disaster waiting to happen, since nearly every property bought since 2005 is “underwater” on its mortgage. And as these loans mature over the next several years, owners who cannot pony up enough cash to get new financing will be sending their keys back to the bank.
The risks for market participants going forward are likely to intensify in the second half of 2010 as global GDP slows from robust levels. For currency traders, that will present another opportunity to long the dollar against the PEAK. Actually, the dollar is very likely to continue strengthening going forward no matter which way the U.S. economy goes.
If employment and other data surprise to the upside, traders will bet that the Fed is moving ever closer to real tightening (even though it won’t happen in 2010). And anything that causes investors to turn risk averse will cause them to move reflexively into dollars and treasuries, as we’ve seen repeatedly over the last several years. The only scenario in which that wouldn’t happen is if the risk of default by the U.S. increases, something which is so far-fetched that not even Nouriel Roubini would mention it.